USD/CAD Analysis: Corrective pullback stalls near 38.2% Fibo., focus shifts to BoC

• USD/CAD dived to over a two-week low on Tuesday amid a strong follow-through rally in oil prices.
• The risk-on mood undermined the safe-haven USD and contributed to the overnight sharp decline.
• Investors look forward to the latest BoC monetary policy decision for a fresh directional impetus.

The USD/CAD pair witnessed aggressive selling for the second successive day on Tuesday and extended its retracement slide from the highest level since September 20 touched last week. Investors abandoned all concerns about the impact of the new coronavirus variant on the global fuel demand eased after reports indicated that Omicron patients had only shown mild symptoms. This, in turn, led to a strong follow-through rally in crude oil prices, which underpinned the commodity-linked loonie and exerted heavy pressure on the major.

In another sign of confidence in oil demand, the world's top exporter, Saudi Arabia, raised monthly crude prices on Sunday. Further supporting the black gold was a delay in the return of Iranian crude supply and a larger than expected draw in US inventories. The American Petroleum Institute reported that US crude inventories declined 3.1 million barrels during the week ended November 30 as compared to a fall of 747,000 barrels in the previous week. Apart from this, a subdued USD demand contributed to the pair's overnight downfall.

The risk-on rally in the global equity markets was seen as a key factor that dented the greenback's relative safe-haven status amid absent relevant market moving economic releases. That said, the prospects for a faster policy tightening by the Fed acted as a tailwind for the buck amid a further recovery in the US Treasury bond yields. This, however, did little to lend any support to the major or stall the sharp intraday slump, which took along some short-term trading stops placed near the 1.2700 round-figure mark.

The pair now seems to have entered a bearish consolidation phase and was seen oscillating in a narrow trading band near the 1.2635-40 region, or over a two-week low through the Asian session on Wednesday. Investors now seemed to have moved on the sidelines and await a fresh catalyst from the Bank of Canada monetary policy decision, scheduled to be announced later during the North American session. This, along with the official US crude oil inventories data, will infuse volatility around the pair and provide some meaningful impetus.

Technical outlook

From a technical perspective, the corrective pullback, for now, seems to have stalled near support marked by the 38.2% Fibonacci level of the 1.2288-1.2845 move up. Given the overnight sustained break below a cluster of supports near the 1.2700 mark, some follow-through selling will be seen as a fresh trigger for bearish traders. The pair might then turn vulnerable to prolong the corrective slide and accelerate the downward momentum towards the 1.2600 mark, en-route the 50% retracement level, around the 1.2570 region.

On the flip side, any meaningful recovery move now seems to confront stiff resistance near the 1.2700 mark (nearing the 23.6% Fibo. level). A sustained strength beyond has the potential to lift the pair back towards the 1.2745-50 region. This is followed by resistance near the 1.2775-80 area, above which the pair seems all set to surpass the 1.2800 mark and climb back to challenge multi-month high, around mid-1.2800s.