USD/CAD rallies to the highest level since December 2020, further beyond 1.2900

• USD/CAD gained strong follow-through traction for the fifth consecutive session on Friday.
• Expectations that the Fed will begin tapering soon, the risk-off mood underpinned the USD.
• Sliding crude oil prices weighed heavily on the loonie and contributed to the strong move up.

The USD/CAD pair continued scaling higher through the early European session and shot to fresh YTD tops, around the 1.2920 region in the last hour.

A combination of factors assisted the USD/CAD pair to prolong this week's strong bullish momentum for the fifth successive day and built on the recent bounce from the key 1.2500 psychological mark. The buying interest around the US dollar remained unabated amid firming market expectations that the Fed will begin tapering its asset purchases later this year. This, along with the recent slump in crude oil prices, undermined the commodity-linked loonie and provided an additional boost to the major.

The minutes of the latest FOMC meeting held on July 27-28 now seems to have convinced investors that the Fed is comfortable to roll back the pandemic-era stimulus. In fact, policymakers thought that the benchmark of substantial further progress has been met in terms of inflation and maximum employment. Apart from this, the prevalent risk-off environment was seen as another factor that benefitted the greenback's relative safe-haven status and contributed to the USD/CAD pair's ongoing positive move.

Investors remain worried about the potential economic fallout from the fast-spreading Delta variant of the coronavirus and its impact on the fuel demand outlook. This was evident from this week's sharp fall of around 6% in crude oil prices to the lowest level since May 21. This, in turn, acted as a headwind for the Canadian dollar and continued driving the USD/CAD pair. The strong move up could further be attributed to some technical buying above the previous swing highs, around the 1.2800-1.2810 area.

Market participants now look forward to the release of Canadian monthly Retail Sales data for some impetus later during the early North American session. The key focus, however, will be on the Jackson Hole Symposium scheduled for 26 to 28 August. In the meantime, the fundamental backdrop seems tilted in favour of bullish traders and supports prospects for additional gains for the USD/CAD pair. That said, extremely overbought RSI on short-term charts warrants some caution before placing fresh bets.

Technical levels to watch