• USD/CAD drifts lower for the fifth straight day and drops to a fresh two-month low on Friday.
• Expectations for an imminent Fed rate-hike pause weigh on the USD and exert some pressure.
• A modest downtick in Oil prices undermines the Loonie and limits the downside for the major.

The USD/CAD pair enters a bearish consolidation phase and oscillates in a narrow range near a fresh two-month low touched earlier this Friday. The pair trades around the 1.3325-1.3330 region through the first half of the European session and remains in the negative territory for the fifth successive day.

The US Dollar (USD) drops to a one-year low amid growing acceptance that the Federal Reserve (Fed) is nearly done with its rate-hiking cycle and turns out to be a key factor exerting some pressure on the USD/CAD pair. In fact, the markets now seem convinced that the US central bank will pause after hiking one last time next month. The bets were lifted by the incoming US macro data, which pointed to signs of easing inflationary pressures.

Moreover, the March FOMC meeting minutes released on Wednesday showed that several policymakers considered pausing interest rate increases after the failure of two regional banks. This continues to act as a headwind for the US Treasury bond yields and is seen weighing on the Greenback. That said, a generally weaker tone around the equity markets helps limit losses for the safe-haven buck and lends some support to the USD/CAD pair.

The International Monetary Fund (IMF) earlier this week trimmed its 2023 global growth outlook, citing the impact of higher interest rates. This, along with worries that the post-COVID recovery in China is losing steam, raised recession fears and keep a lid on the optimism witnessed since the beginning of this week. Apart from this, softer Crude Oil prices undermine the commodity-linked Loonie and act as a tailwind for the USD/CAD pair.

Investors remain concerned that a deeper global economic downturn will dent fuel demand, which, in turn, drags Oil prices away from a fresh YTD peak touched on Wednesday. That said, a surprise decision last week by OPEC+ to cut output lends some support to the black liquid. This, along with the Bank of Canada's (BoC) readiness to raise borrowing costs again if needed to restore price stability, limits losses for the Canadian Dollar.

The aforementioned fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the downside. The negative outlook is reinforced by the overnight breakdown through a multi-month-old ascending trend-line support and a technically significant 200-day Simple Moving Average (SMA). Hence, any attempted recovery might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.

Market participants now look forward to the US economic docket, featuring the release of monthly Retail Sales figures and the Preliminary Michigan Consumer Sentiment Index later during the early North American session. This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/CAD pair. Apart from this, traders will take cues from Oil price dynamics to grab short-term opportunities.

Technical levels to watch