USD/CAD Forecast: Not out of the woods yet, BoC eyed for some meaningful impetus

• A modest USD strength allowed USD/CAD to gain some positive traction on Tuesday.
• The ongoing bullish run in oil prices underpinned the loonie and capped the upside.
• Investors now look forward to the BoC monetary policy decision for a fresh impetus.

The USD/CAD pair gained some positive traction on Tuesday and climbed back above the 1.2100 round-figure mark. The intraday positive move was exclusively sponsored by a modest US dollar strength, though bullish crude oil prices underpinned the commodity-linked loonie and kept a lid on any runaway rally. Investors remain concerned about rising inflationary pressure, which might force the Fed to start the discussion on tapering its asset purchases sooner rather than later. This, in turn, was seen as a key factor that acted as a tailwind for the greenback ahead of Thursday's release of the latest US consumer inflation figures. That said, the ongoing decline in the US Treasury bond yields capped the upside for the greenback.

On the other hand, the Canadian dollar found some support from a fresh leg up in oil prices. In fact, WTI crude surged past the key $70.00 psychological mark for the first time since October 2018 amid signs of strong fuel demand in western economies. Meanwhile, the prospects of Iranian supplies returning to the market faded after the US Secretary of State Antony Blinken said that sanctions against Tehran would remain in place. A fresh set of talks between Iran and global powers over a nuclear accord is set to start on Thursday in Vienna. The momentum was further fueled by crude oil supply data from the American Petroleum Institute, which showed a draw of 2.108 million barrels for the week ending June 4.

This comes on the back of a more hawkish Bank of Canada. It is worth recalling that the BoC became the first major central bank to cut back on its pandemic-era stimulus programs at the April meeting. The central bank also brought forward the guidance for the first interest rate hike to the second half of 2022. The combination of factors held traders from placing any aggressive bullish bets as market participants now look forward to the latest BoC monetary policy decision, due later during the North American session on Wednesday. Apart from this, the official crude oil supply data from the US Energy Information Administration will further contribute to producing some meaningful trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the pair, so far, has been oscillating in a range over the past one month or so. This constitutes the formation of a rectangle, which is considered as a continuation pattern and marks a brief pause in the trend. Moreover, the pair’s inability to register any meaningful recovery from multi-year lows further suggests that the near-term bearish trend is still far from being over. That said, a sustained strength beyond the top boundary of the trading range, around the 1.2135-45 region might trigger a short-covering move. This should allow the pair to aim back to reclaim the 1.2200 mark. Some follow-through buying has the potential to lift the pair further towards the 1.2265 horizontal support breakpoint, now turned resistance.

On the flip side, the weekly swing lows, around the 1.2060-55 region now seems to protect the immediate downside. Failure to defend the mentioned support might turn the pair vulnerable to slide back towards challenging the key 1.2000 psychological mark. A convincing break below will set the stage for a further near-term depreciating move towards May 2015 lows, around the 1.1920 region.