USD/CAD Analysis: Bulls looking to seize back control, Canadian CPI/Powell’s testimony eyed

The USD/CAD pair regained positive traction during the Asian session on Wednesday and snapped a two-day losing streak to the 1.2900 neighbourhood, stalling the recent pullback from the YTD peak. As investors looked past Tuesday's upbeat Canadian Retail Sales data, a sharp fall in crude oil prices undermined the commodity-linked loonie. Investors remain concerned about slowing global economic growth and fuel demand. This, along with a push by US President Joe Biden to bring down soaring fuel costs, dragged crude oil prices to over a one-month low.

Apart from this, the emergence of fresh US dollar buying extended support to the USD/CAD pair. The USD continued drawing support from firming market expectations that the Federal Reserve would retain its aggressive policy tightening stance to curb soaring inflation. The bets were reaffirmed by Fed Governor Christopher Waller's comments on Sunday, saying that he was open to another rate hike of 75 bps in July. Moreover, the Fed's dot plot showed that the median projection for the federal funds rate stood at 3.4% for 2022 and 3.8% in 2023.

Meanwhile, investors remain worried that a more aggressive move by major central banks to combat stubbornly high inflation would pose challenges to global economic growth. This was evident from a generally weaker tone around the equity markets, which was seen as another factor that benefitted the safe-haven greenback. The combination of factors pushed the USD/CAD pair back above the mid-1.2900s, though it remains to be seen if bulls are able to capitalize on the move or refrain from placing fresh bets ahead of the key data/event risks.

Wednesday's economic docket highlights the release of the latest Canadian consumer inflation figures, which along with oil price dynamics, will influence the CAD. The focus, however, will remain on Fed Chair Jerome Powell's semi-annual testimony before the Senate Banking Committee. Apart from this, traders will take cues from the US bond yields and the broader market risk sentiment. This, in turn, would drive the USD demand and produce short-term trading opportunities around the USD/CAD pair.

Technical outlook

From a technical perspective, the recent pullback from the YTD peak stalled near the 1.2900 mark. The said handle should now act as a key pivotal point and is closely followed by the 1.2885-1.2880 horizontal resistance breakpoint. Some follow-through selling would suggest that the USD/CAD pair has topped out in the near-term and prompt aggressive selling. Spot prices would then accelerate the fall towards testing the next relevant support near the 1.2800 round-figure mark.

On the flip side, the 1.3000 psychological mark now seems to act as an immediate resistance ahead of the recent daily closing high, around the 1.3025 region. Sustained strength beyond has the potential to lift the USD/CAD pair back towards the 1.3075-1.3080 supply zone. Some follow-through buying, leading to a subsequent move beyond the 1.3100 mark, would be seen as a fresh trigger for bullish traders and pave the way for an extension of a two-week-old upward trajectory.