USD/CAD Outlook: 1.3500 support breakpoint continues to cap, downside seems cushioned

• USD/CAD retreats from over a one-week high reached on Monday amid a solid recovery in oil prices.
• A modest recovery in the risk sentiment weighs on the USD and keeps the pair depressed on Tuesday.
• China’s COVID-19 woes keep a lid on oil prices and should help limit any further decline for the pair.

The USD/CAD pair shot to a one-and-half-week high on Monday, albeit struggled to capitalize on the move and failed just ahead of the 1.3500 psychological mark. Concerns about the worsening COVID-19 situation in China, along with fears of a potential escalation in the Russia-Ukraine conflict, temper investors' appetite for riskier assets. This, in turn, assisted the safe-haven US Dollar to build on last week's recovery move from its lowest level since August 12. Apart from this, an intraday slump in crude oil prices undermined the commodity-linked Loonie and provided a strong boost to the major.

In fact, the black liquid collapsed back closer to the YTD low in reaction to a Wall Street Journal story that OPEC+ will announce a production hike of 500,000 barrels per day at the December meeting. Saudi Energy Minister Abdulaziz bin Salman, however, denied the report, which led to a sharp recovery in crude oil prices. This, in turn, offered some support to the Canadian Dollar and acted as a headwind for the USD/CAD pair. Spot prices retreated around 50 pips from the daily peak and remained on the defensive through the Asian session on Tuesday, though the downside seems cushioned.

A slight recovery in the risk sentiment prompts some USD selling and exerts some downward pressure on the USD/CAD pair. That said, worries that the imposition of fresh COVID-19 restrictions in China will dent fuel demand keeps a lid on crude oil prices and helps limits the downside for the major. Market participants now look forward to the release of Canadian monthly Retail Sales data and the Richmond Manufacturing Index from the US for a fresh impetus. Apart from this, a scheduled speech by Cleveland Fed President Loretta Mester will drive the USD demand. This, along with oil price dynamics, should further contribute to producing some meaningful trading opportunities around the pair.

Technical Outlook

From a technical perspective, the recent bounce from the 100-day SMA and the overnight sustained move above the 1.3400 round figure could be seen as a fresh trigger for bulls. That said, failure near the 1.3500 mark strong support breakpoint, now turned resistance, warrants some caution. Hence, it will be prudent to wait for strong follow-through buying beyond the said handle before confirming that the USD/CAD pair has formed a near-term bottom. The subsequent move-up could then lift spot prices to the 50-day SMA, currently around the 1.3550-1.3555 region. Some follow-through buying suggests that the recent corrective pullback from the highest level since May 2020 has run its course and set the stage for additional gains.

On the flip side, the 1.3400 mark now seems to protect the immediate downside. Any further decline is more likely to find decent support near the 1.3330-1.3325 region. This is closely followed by the 1.3300 round figure, which if broken decisively will shift the near-term bias back in favour of bearish traders. The USD/CAD pair might then accelerate the fall back towards challenging the 100-day SMA, currently near the 1.3260-1.3255 region. Some follow-through selling below the 1.3230-1.3225 area, or the monthly low, should pave the way for a further near-term depreciating move.