USD/CAD trades with modest losses around 1.2625 area, downside seems limited

• USD/CAD witnessed some selling for the third consecutive session on Monday.
• A combination of factors should help limit losses and warrant caution for bears.
• A sustained break below the 1.2600 mark is needed to confirm a fresh breakdown.

The USD/CAD pair remained on the defensive heading into the European session and was last seen trading with modest losses, around the 1.2625 region.

The pair edged lower for the third successive session on Monday, though a combination of factors helped limit any deeper losses. Retreating crude oil prices undermined the commodity-linked loonie. This, along with a modest US dollar strength, extended some support to the USD/CAD pair.

Firming market expectations about an early policy tightening by the Fed acted as a tailwind for the USD, which further benefitted from a softer risk tone. Investors seem convinced that the Fed would begin tapering its bond purchases before the end of 2021 and raise interest rates in 2022.

Apart from this, renewed concerns about China Evergrande Group's debt woes weighed on investors' sentiment and drove some haven flows towards the safe-haven greenback. This makes it prudent to wait for some strong follow-through selling before placing fresh bearish bets around the USD/CAD pair.

Even from a technical perspective, the pair, so far, has managed to hold its neck comfortably above the 1.2600 mark and last week's swing lows. This should act as a key pivotal point for intraday traders amid absent relevant market-moving economic releases, either from the US or Canada.

Meanwhile, the broader market risk sentiment will influence the USD and provide a fresh impetus to the USD/CAD. Apart from this, oil price dynamics might further contribute to producing some short-term trading opportunities around the USD/CAD pair.

Technical levels to watch