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USD/CAD Forecast: Bulls await sustained move beyond 1.2200 mark, US Retail Sales in focus

  • A slump in oil prices undermined the loonie and assisted USD/CAD to gain traction on Thursday.
  • A combination of factors kept the USD bulls on the defensive and capped the upside for the pair.
  • Investors now look forward to the US monthly Retail Sales report for some meaningful impetus.

The USD/CAD pair built on the previous day's US CPI-inspired solid bounce from the lowest level since May 2015 and gained some follow-through traction on Thursday. The momentum pushed the pair to over one-week tops, though bulls struggled to capitalize on the strength beyond the 1.2200 mark. The uptick was sponsored by heavy selling in the oil market, which undermined the commodity-linked loonie.

The ever-surging new COVID-19 cases in India continued fueling worries about the fuel demand recovery. This, in turn, was seen as a key factor that acted as a headwind for the commodity. Oil traders largely shrugged off Wednesday's bullish report by the International Energy Agency (IEA), noting that the demand for crude is outpacing supply and that the discrepancy will grow further. This comes after the OPEC report earlier this week pointed to strong fuel demand recovery in 2021 amid the prospects for strong economic growth in the US and China.

On the other hand, a combination of factors failed to assist the US dollar to preserve its intraday gains to one-week tops and kept a lid on any further gains for the major. A sharp pullback in the US Treasury bond yields held the USD bulls from placing aggressive bets. This, along with a positive turnaround in the equity markets, further dented the greenback's relative safe-haven status. However, a duo of upbeat US economic releases helped limit any meaningful USD decline.

The US Department of Labor (DOL) reported that the number of Americans filing for unemployment insurance fell to a 14-month low of 473K during the week ending May 8. Separately, the Producer Price Index rose 0.6% in April and 6.2% YoY, surpassing consensus estimates. Against the backdrop of a red-hot US CPI report on Wednesday, this pointed to a build-up of inflationary pressure amid improving prospects for growth, plans for infrastructure spending and pandemic-related stimulus measures.

That said, the data failed to shift the Fed's view that any spike in inflation will be temporary. Nevertheless, the pair ended the day with modest gains and edged higher for the third consecutive session on Friday amid a softer tone surrounding crude oil prices. The market attention now shifts to the US monthly Retail Sales figures, due later during the early North American session.

The report will be closely scrutinized for guidance on whether the upward pressure on prices will persist and play a key role in driving the Fed rate expectations. This, along with the broader market risk sentiment will influence the USD. Apart from this, oil price dynamics will also contribute to producing some meaningful trading opportunities on the last day of the week.

Short-term technical outlook

From a technical perspective, the attempted recovery stalled near a resistance marked by 23.6% Fibonacci level of the recent decline from the 1.2655 region. This makes it prudent to wait for a sustained strength beyond the 1.2200 mark before confirming that the pair has bottomed out in the near term. This will set the stage for a further appreciating move towards the 38.2% Fibo. level, around the 1.2275-80 region. Some follow-through buying has the potential to push the pair further beyond the 1.2300 mark, towards testing the 50% Fibo. level, around mid-1.2300s.

On the flip side, the 1.2145-35 area now seems to protect the immediate downside ahead of the 1.2100 mark. Sustained weakness below will negate prospects for any near-term recovery and drag the pair back towards multi-year lows, around the 1.2045 region. The downward trajectory could further get extended towards challenging the key 1.2000 psychological mark before the pair eventually drops to May 2015 swing lows, around the 1.1920 region.

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Author

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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