• A combination of factors dragged USD/CAD to a fresh multi-week low on Friday.
• Bullish oil prices underpinned the loonie and exerted pressure amid a weaker USD.
• Signs that the Fed might pause later this year continued weighing on the greenback.

The USD/CAD pair weakened further below mid-1.2700s through the first half of the European session and dropped to a fresh three-month low in the last hour.

A combination of factors dragged the USD/CAD pair lower for the second successive day on Friday, taking along some trading stops near the previous weekly low support near the 1.2765-1.2760 region. Crude oil prices held steady near a two-month high and continued underpinning the commodity-linked loonie. Apart from this, the prevalent bearish sentiment surrounding the US dollar exerted downward pressure on the major.

Despite worries about softening global economic growth, expectations of demand recovery in China and the impending European Union embargo on Russian oil imports extended support to the black liquid. Furthermore, OPEC+ is expected to stick to last year's oil production deal at its June 2 meeting and raise July output targets by 432K barrels per day. This added to supply concerns and acted as a tailwind for oil.

On the other hand, the USD was pressured by speculations that the Fed could pause the rate hike cycle later this year amid the worsening economic outlook. Doubt over the Fed's ability to bring inflation under control without sinking the economy into recession dragged the yield on the benchmark 10-year US government bond fell to a six-week low. This, along with the risk-on impulse, weighed on the safe-haven greenback.

The fundamental backdrop seems tilted in favour of bearish traders and a break below the weekly low supports prospects for a further near-term depreciating move for the USD/CAD pair. Hence, some follow-through decline, towards testing the 100-day SMA, currently around the 1.2700-1.2695 region, remains a distinct possibility.

Technical levels to watch