USD/CAD Analysis: Bears await a sustained break below descending channel support

The USD/CAD pair attempted a modest recovery on the first day of a new trading week, albeit struggled to capitalize on the move or find acceptance above the 1.2400 round-figure mark. The US dollar was back in demand amid a fresh leg up in the US Treasury bond yields, which, in turn, was seen as a key factor that extended some support to the major. In fact, the yield on the benchmark 10-year US government bond shot back above the 1.60% threshold amid expectations for an imminent Fed taper announcement in 2021.

Moreover, investors have been betting on a potential rate hike in 2022 amid worries about a faster-than-expected rise in inflation. However, the prospects for an early policy tightening by the Fed is fully priced in the markets. This was evident from an intraday pullback in the US bond yields, which acted as a headwind for the greenback and kept a lid on any further gains for the major. The USD was further weighed down by dismal US Industrial Production data, which fell by the most in seven months and contracted 1.3% in September.

Apart from this, a solid intraday bounce in the US equity markets was seen as another factor that prompted some selling around the safe-haven greenback. On the other hand, the recent strong bullish run in crude oil prices to multi-year tops continued underpinning the commodity-linked loonie. The combination of factors dragged the pair to the lowest level since early July during the Asian session on Tuesday. In the absence of any major market-moving economic data, the USD/oil price dynamics will continue to play a key role in influencing the major.

Technical outlook

From a technical perspective, the pair was last seen flirting with the lower boundary of a downward sloping channel extending from September monthly swing highs. A convincing break below the trend-channel support, currently around the 1.2325 region, will be seen as a fresh trigger for bearish traders. The pair might then turn vulnerable to break below the 1.2300 mark and accelerate the slide further towards the next relevant support near mid-1.2200s.

On the flip side, the overnight swing highs, around the 1.2400-1.2410 area, now seems to act as immediate resistance. A sustained move beyond might trigger a short-covering move and allow the pair to aim back to reclaim the key 1.2500 psychological mark. The latter marks a confluence hurdle comprising of the very important 200-day SMA and trend-channel resistance, which, in turn, should cap any further gains for the major.