USD/CAD Analysis: Bulls defend 50% Fibo., remain at the mercy of USD price dynamics

• A combination of factors assisted USD/CAD to stage a solid bounce from a multi-week low.
• Weaker oil prices undermined the loonie and acted as a tailwind amid renewed USD buying.
• Recession fears, aggressive Fed rate hike bets helped revive demand for the safe-haven buck.

The USD/CAD pair staged a goodish rebound from a nearly three-week low touched earlier this Tuesday and climbed back above the 1.2800 mark during the Asian session. The intraday move up was sponsored by the emergence of some US dollar buying and weaker crude oil prices, which tend to undermine the commodity-linked loonie.

The overnight optimism led by hopes that loosening of COVID-19 lockdowns in China would boost the global economy faded rather quickly amid the worsening global economic outlook. Investors remain worried that a more aggressive move by major central banks to curb soaring inflation could pose challenges to the global economy. Adding to this, the Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling recession fears. This, in turn, triggered a fresh wave of the global risk aversion trade and drove haven flows towards the greenback.

Apart from this, concerns about faltering fuel demand overshadowed a tight global supply outlook and dragged crude oil prices lower. That said, expectations of demand recovery in China and the European Union's impending embargo on Russian oil imports could offer some support to the black liquid. Nevertheless, weaker crude oil prices weighed on the Canadian dollar and further acted as a tailwind for the USD/CAD pair, allowing spot prices to recover a major part of the overnight decline. Market participants now look forward to the flash US PMI prints for a fresh impetus.

The focus, however, will remain on Fed Chair Jerome Powell's speech, due later during the early North American session. Apart from this, the FOMC monetary policy meeting minutes, scheduled for release on Wednesday, will be looked upon for clues about the possibility of a jumbo rate hike in June. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/CAD pair.

Technical outlook

From a technical perspective, the pair defended and recovered from the 50% Fibonacci retracement level of the 1.2459-1.3077 strong move up. The said support, around the 1.2765-1.2760 region, should now act as a pivotal point, which, if broken decisively, will set the stage for an extension of the recent sharp pullback from the highest level since November 2020. The USD/CAD pair might then accelerate the downfall towards testing intermediate support near the 1.2720-1.2715 region before eventually dropping to sub-1.2700 levels, or the 61.8% Fibo. level.

The latter coincides with the 100-day SMA and is followed by the very important 200-day SMA, around the 1.2660-1.2665 zone. Some follow-through selling would suggest that the USD/CAD pair has topped out in the near-term and prompt fresh technical selling. The subsequent decline has the potential to drag spot prices further towards the 1.2600 mark en-route the next relevant support near the 1.2560 horizontal zone.

On the flip side, any subsequent move up is more likely to confront stiff resistance near the 38.2% Fibo. level, around the 1.2835-1.2840 region. Sustained strength beyond might trigger a short-covering bounce and allow bulls to aim back to reclaim the 1.2900 round-figure mark. The momentum could further get extended towards the 1.2930 zone, or the 23.6% Fibo. level, which if cleared decisively will negate any near-term bearish bias.