USD/CAD clings to modest recovery gains, remains below 1.2500 mark

• A pickup in the USD demand assisted USD/CAD to stage a modest bounce from multi-year lows.
• Bullish oil prices, Friday’s stellar Canadian jobs report underpinned the loonie and capped gains.

The USD/CAD pair traded with a mild positive bias through the early European session, albeit lacked any follow-through and remained below the key 1.2500 psychological mark.

The pair staged a modest bounce following an early dip to the lowest level since February 2018, around the 1.2455 region and was supported by the emergence of some fresh US dollar buying. Investors have been betting on a relatively faster US economic recovery from the pandemic, which was seen as a key factor that benefitted the USD.

The optimistic US economic outlook was further bolstered by the passage of a massive $1.9 trillion stimulus package, which fueled speculations for an uptick in US inflation. This, in turn, raised doubts that the Fed would retain ultra-low interest rates for a longer period and pushed the US bond yields to over one-year tops.

Elevated Treasury bond yields extended some additional support to the greenback and assisted the USD/CAD pair to gain some traction on the first day of a new trading week. However, a combination of factors continued underpinning the Canadian dollar and kept a lid on any meaningful upside for the major, at least for the time being.

An extension of output cuts from major producers and improving global fuel demand outlook remained supportive of the prevalent bullish sentiment surrounding oil prices. Apart from this, Friday's blockbuster Canadian employment details extended some support to the commodity-linked loonie and capped gains for the USD/CAD pair.

There isn't any major market-moving data due for release from Canada on Monday and the US economic docket features the only release of the Empire State Manufacturing Index. This makes it prudent to wait for some strong follow-through buying before confirming that the USD/CAD pair has bottomed out in the near-term and positioning for any strong recovery.

Technical levels to watch