USD/CAD Outlook: 1.2900 holds the key for bulls, US GDP/Canadian Retail Sales in focus

• USD/CAD struggled to preserve its intraday gains on Thursday and settled just above the 1.2800 mark.
• An uptick in crude oil prices underpinned the loonie and kept a lid on any further gains for the major.
• Recession fears extended some support to the safe-haven USD and helped regain traction on Friday.

The USD/CAD pair witnessed good two-way price moves on Thursday and finally settled nearly unchanged for the day, just above the 1.2800 round-figure mark. Concerns about softening global economic growth assisted the safe-haven US dollar to make a solid comeback and snap a two-day losing streak to a nearly one-month low. This was seen as a key factor that lifted the pair to a fresh weekly high, though an uptick in crude oil prices underpinned the commodity-linked loonie and acted as a headwind.

Expectations of demand recovery in China and the prospect of a European Union embargo on Russian oil imports extended some support to the black liquid. In fact, the European Council President Charles Michel said on Wednesday he is confident that an agreement can be reached before the EU summit on May 30. Furthermore, a bigger-than-expected drawdown in US crude inventories buoyed oil prices. Apart from this, modest USD pullback from the daily top attracted some selling around the USD/CAD pair.

The greenback trimmed a part of its intraday gains following the release of the FOMC meeting minutes, which showed that most participants believed a 50 bps rate increase would likely be appropriate in June and July. The minutes, however, lacked any major surprises as the expected move is already priced in, reaffirming the idea that the Fed could pause the rate hike cycle later this year. This, along with a goodish recovery in the US equity markets, held back the USD bulls from placing aggressive bets.

The pair retreated over 80 pips from the daily swing low, though the pullback lacked follow-through and was quickly bought into during the Asian session on Thursday. The worsening global economic outlook continued weighing on investors' sentiment and drove some haven flows toward the buck, which, in turn, assisted the USD/CAD pair to regain positive traction. It, however, remains to be seen if bulls are able to capitalize on the move or wait for the release of key macro data from the US and Canada.

Canadian Retail Sales figures, along with Prelim Q1 GDP, the usual Weekly Initial Jobless Claims and Pending Home Sales from the US, are due for release later during the early North American session. Apart from this, the broader market risk sentiment will influence the USD and provide some impetus to the USD/CAD pair. Traders will further take cues from oil price dynamics to grab short-term opportunities.

Technical outlook

From a technical perspective, the pair this week defended and bounce from the 50% Fibonacci retracement level of the 1.2459-1.3077 strong move up. That said, bulls, so far, have been struggling to find acceptance above the 38.2% Fibo. level and repeated failures ahead of the 1.2900 mark warrants caution before positioning for any further gains. Sustained strength beyond the said handle could push spot prices towards the 1.2930 zone, or the 23.6% Fibo. level, which if cleared decisively will negate any near-term bearish bias.

On the flip side, weakness below the 1.2800 mark might continue to find decent support near the 1.2765-1.2760 region, or the 50% Fibo. level, which should now act as a pivotal point. A convincing break below will set the stage for an extension of the recent sharp pullback from the highest level since November 2020. The USD/CAD pair might then accelerate the downfall towards testing intermediate support near the 1.2720-1.2715 region before eventually dropping to sub-1.2700 levels, or the 61.8% Fibo. level.

The latter coincides with the 100-day SMA and is followed by the very important 200-day SMA, around the 1.2660-1.2665 zone. Some follow-through selling would suggest that the USD/CAD pair has topped out in the near-term and prompt fresh technical selling. The subsequent decline has the potential to drag spot prices further towards the 1.2600 mark en-route the next relevant support near the 1.2560 horizontal zone.