USD/CAD Analysis: Bulls remain hopeful above 1.2625-20 horizontal support

• A combination of factors prompted aggressive selling around the USD/CAD pair on Thursday.
• The risk-on mood weighed on the safe-haven USD; bullish oil prices underpinned the loonie.
• Surging US bond yields helped revive the USD demand and provided a modest lift on Friday.

The USD/CAD pair dived to one-week lows on Thursday and was pressured by a combination of factors. The US dollar weakened across the board and reversed the previous day's post-FOMC gains to the highest level since August 20. The Fed indicated that it will likely begin reducing its monthly bond purchases toward the end of this year. This, however, disappointed some investors expecting an immediate start to the withdrawal of the massive pandemic-era stimulus and prompted some selling around the greenback.

Apart from this, the risk-on environment exerted additional pressure on the safe-haven greenback. The global risk sentiment improved further after the People’s Bank of China injected more money into the banking system, easing concerns about contagion from a potential China Evergrande default. This comes a day after the debt-ridden developer said it would make interest payments on an onshore bond, though it was still not clear whether the group made coupon payments on dollar bonds due on Thursday.

On the other hand, bullish crude oil prices underpinned the commodity-linked and further contributed to the heavily offered tone surrounding the major. In fact, WTI crude oil rallied back closer to July swing highs amid signs of strengthening fuel demand and global supply concerns. This, to a larger extent, helped offset disappointing Canadian Retail Sales data, which missed expectations by a big margin and contracted 0.6% in July. Excluding automobiles, Retail Sales in Canada declined by 1% during the reported month as against consensus estimates for an increase of 4.6%.

From the US, the Weekly Initial Jobless Claims unexpectedly jumped to 351K last week from the 335K previous and did little to provide any respite to the USD bulls. That said, prospects for earlier interest rate hikes by the Fed helped limit any further losses for the greenback. It is worth recalling that the so-called dot plot revealed a growing inclination to raise interest rates in 2022. The market expectations pushed the yield on the benchmark 10-year government bond back above the 1.4% threshold for the first time since July. This, in turn, helped revive the USD demand and assisted the pair to gain some positive traction during the Asian session on Friday.

Market participants now look forward to Fed Chair Jerome Powell's scheduled speech at an online event later during the early North American session. This, along with the broader market risk sentiment and the US bond yields, will influence the USD. Apart from this, traders might further take cues from oil price dynamics for some short-term opportunities on the last day of the week.

Technical outlook

From a technical perspective, this week’s retracement slide from the vicinity of the 1.2900 mark stalled just ahead of the 1.2625-20 horizontal support. This should now act as a key pivotal point for short-term traders and help determine the near-term trajectory. Some follow-through selling below the 1.2600 mark has the potential to drag the pair back towards the very important 200-day SMA, currently near the 1.2520 region. This is closely followed by the key 1.2500 psychological mark, which if broken decisively will set the stage for further losses.

On the flip side, the 1.2700 round-figure mark now seems to act as immediate strong resistance. A sustained move beyond might trigger a short-covering move and lift the pair further beyond an intermediate hurdle near the 1.2760-65 region, towards reclaiming the 1.2800 mark. The momentum could further get extended towards the 1.2825-30 zone, above which bulls are likely to aim to conquer the 1.2900 mark.