USD/CAD clings to gains above 1.2300 mark, lacks bullish conviction

• USD/CAD regained some positive traction on Monday, albeit lacked follow-through buying.
• A modest pullback in oil prices undermined the loonie and remained supportive of the uptick.
• Mixed signals on the US inflation, sliding US bond yields weighed on the USD and capped gains.

The USD/CAD pair held above the 1.2300 mark through the first half of the European session, albeit lacked any strong follow-through buying.

The pair managed to regain some positive traction on the first day of a new trading week and recovered a part of Friday's losses. The uptick was supported by a modest pullback in crude oil prices, which tend to undermine demand for the commodity-linked loonie. That said, a modest US dollar weakness kept a lid on any meaningful gains for the USD/CAD pair, at least for the time being.

Oil prices struggled to capitalize on the early uptick to the highest level since October 2018 as market participants turned cautious ahead of the OPEC+ meeting this week. Moreover, rising COVID-19 cases in Asia, to a larger extent, offset the prospects for a strong recovery in the fuel demand and further held traders from placing fresh bullish bets around the black gold.

On the other hand, the USD was weighed down by mixed signals on the US inflation and sliding US Treasury bond yields. The Fed Chair Jerome Powell reiterated the transitory inflation narrative and said that the price pressures should ease on their own. However, data released on Friday showed that the Core PCE Price Index recorded the largest gain since April 1992.

Meanwhile, investors remain concerned that the Fed will tighten its monetary policy if inflationary pressures continue to intensify. This, along with the prevalent cautious mood around the equity markets, acted as a tailwind for the greenback, This, in turn, extended some support to the USD/CAD pair, though the lack of follow-through buying warrants caution for bullish traders.

There isn't any major market-moving economic data due for release on Monday, either from the US or Canada. Hence, the US bond yields and the broader market risk sentiment will play a key role in influencing the USD. Apart from this, oil price dynamics might also provide some impetus to the USD/CAD pair and allow traders to grab some short-term opportunities.

Technical levels to watch