USD/CAD Analysis: Overnight bounce invalidates trading range breakdown

The USD/CAD pair stalled this week's rejection slide from the 1.2625-30 supply zone and staged a goodish rebound from monthly lows touched on Thursday. The US dollar remained depressed through the first half of the trading action and tumbled to four-week lows in the wake of the continuous decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond fell sharply to a one-month low amid expectations that the Fed will keep interest rates near zero levels for a longer period. This, in turn, was seen as a key factor that dragged the pair further below the key 1.2500 psychological mark, to the lowest level since March 22.

The USD, however, found some support following the release of mostly upbeat US macro data, which assisted the pair to find decent support near the 1.2475 region. The Commerce Department reported that Retail Sales rose 9.8% MoM in March as against consensus estimates pointing to a 5.9% growth. This marked the best figure since May 2020. Adding to this, the closely watched Retail Sales Control Group, which has a larger impact on US GDP, surpassed expectations and increased 6.9% during the reported month. Separately, regional manufacturing indices and Weekly Jobless Claims also came in better than market expectations, indicating that the recovery is well on track.

On the other hand, the Canadian dollar was weighed down by a devastating third wave of COVID-19 infections driven by more transmissible and dangerous variants. This was seen as another factor that contributed to the pair's recovery of over 80 pips. That said, the underlying bullish sentiment in the financial markets held bulls from placing any aggressive bets around the safe-haven USD and kept a lid on any further gains for the major, rather led to a subdued/range-bound price action through the Asian session on Friday. The pair now seems to have stabilized just below mid-1.2500s and remains at the mercy of developments surrounding the coronavirus saga.

Short-term technical outlook

From a technical perspective, the overnight slide below the 1.2500 mark confirmed a bearish break through a four-week-old trading range. That said, the lack of any strong follow-through selling and the subsequent recovery warrants some caution before positioning for any further depreciating move.

Meanwhile, the 1.2560-65 region now seems to have emerged as immediate resistance. A sustained move beyond might trigger some short-covering move and push the pair back towards the 1.2600 mark. This is followed by a strong barrier near the 1.2625-30 region, which coincides with the top boundary of a four-month-old descending trend channel and should act as a key pivotal point for short-term traders.

On the flip side, weakness back below the 1.2500 mark might find some support near the overnight swing lows, around the 1.2475 region. Some follow-through selling will reaffirm the bearish breakdown and turn the pair vulnerable to accelerate the fall towards the 1.2400 mark. The downward trajectory could further get extended towards multi-year lows, around the 1.2365 area touched on March 18.