USD/CAD Forecast: Seems vulnerable to slide further, 1.2900 mark holds the key

• USD/CAD dropped to a two-week low on Thursday and was pressured by a combination of factors.
• Stronger Canadian CPI, a late pickup in crude oil prices underpinned the loonie and exerted pressure.
• A steep decline in the US bond yields weighed on the USD and further contributed to the selling bias.

The USD/CAD pair struggled to capitalize on the previous day's positive move and came under some renewed selling pressure on Thursday. The downward trajectory dragged spot prices to a fresh two-week low and was sponsored by a combination of factors. The Canadian dollar drew support from strong domestic consumer inflation figures released on Wednesday, which showed no signs of easing and rose 6.8% YoY in April - the fastest pace since 1991. The data suggested the Bank of Canada is unlikely to slow down the pace of rate hikes amid a strong labour market, which tends to put upward pressure on prices. Adding to this, a late pickup in crude oil prices further underpinned the commodity-linked loonie and exerted pressure on the major amid broad-based US dollar weakness.

The global flight to safety triggered a steep decline in the US Treasury bond yields and prompted aggressive greenback selling. Adding to this, mostly disappointing US macro data - Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales - aggravated the bearish pressure surrounding the USD. That said, the risk-off environment acted as a tailwind for the safe-haven buck and extended some support to the USD/CAD pair. The markets remain worried that a more aggressive move by major central banks to constrain inflation could pose challenges to global economic growth. Apart from this, the Russia-Ukraine war and extended COVID-19 lockdowns in China have been fueling recession fears, which, in turn, continued weighing on investors' sentiment.

The USD/CAD pair managed to recover around 40-45 pips from the daily swing low, albeit struggled to capitalize on the move and met with a fresh supply during the Asian session on Friday. The global risk sentiment recovered a bit after the People’s Bank of China (PBOC) cut its five-year loan prime rate by 15 basis points to counter an economic slowdown. This, in turn, kept the USD bulls on the defensive and attracted fresh selling around the major. In the absence of any major market-moving US economic releases, the US bond yields and the broader market risk sentiment will influence the USD. Apart from this, oil price dynamics should provide some impetus to the pair on the last day of the week.

Technical outlook

From a technical perspective, repeated failures to find acceptance below the 1.2800 mark warrants some caution for aggressive bearish traders. That said, the pair's inability to move back above the 38.2% Fibonacci retracement level of the 1.2459-1.3077 strong move up supports prospects for further losses. Some follow-through selling below the overnight swing low, around the 1.2780 region, nearing the 50% Fibo. level, will reaffirm the negative outlook. The USD/CAD pair would then accelerate the fall towards testing the 1.2700 confluence, comprising 100-day SMA and the 61.8% Fibo. level. This is followed by the very important 200-day SMA, around the 1.2660 region, which if broken decisively would be seen as a fresh trigger for bearish traders.

On the flip side, the 38.2% Fibo. level, just ahead of mid-1.2800s, now seems to act as an immediate strong resistance. Any subsequent move runs the risk of fizzling out rather quickly near the 1.2890-1.2900 area, above which the USD/CAD pair could climb back to the 23.6% Fibo. level, around the 1.2935-1.2940 region. Some follow-through buying will shift the bias back in favour of bullish traders and allow the pair to aim back to reclaim the 1.3000 psychological mark. The momentum could further get extended towards the recent daily closing high, around the 1.3045-1.3050 zone.