USD/CAD Outlook: Bullish potential intact, dips might be seen as buying opportunity

• USD/CAD witnessed some selling on Tuesday and retreated from five-and-half-month tops.
• A modest bounce in oil prices underpinned the loonie and exerted some downward pressure.
• COVID-19 jitters capped gains for oil and limited losses for the pair amid sustained USD buying.
• Rebounding US bond yields benefitted the USD and helped the pair to regain traction on Wednesday.

Having struggled to find acceptance above the 1.2800 mark, the USD/CAD pair witnessed some selling on Tuesday and eroded a part of the previous day's strong gains to the highest level since February 5. WTI crude oil staged a goodish intraday bounce from sub-$65.00 levels, or near two-month lows and underpinned demand for the commodity-linked loonie. This, in turn, was seen as a key factor that prompted some profit-taking around the major and led to a sharp intraday slide of over 100 pips. That said, concerns about the short-term fuel demand outlook – amid fresh COVID-19 outbreaks involving the Delta variant – capped the upside for the black gold.

Apart from this, sustained US dollar buying helped limit any deeper losses, rather assisted the pair to regain some positive traction during the Asian session on Wednesday. A solid rebound in the US Treasury bond yields pushed the USD Index to the highest level since early April. In fact, the yield on the benchmark 10-year US government bond reversed an intraday slide to more than five-month lows and climbed back above the 1.20% threshold. On the economic data front, US Building Permits dropped 5.1% MoM to a 1.598 million annualized rate in June. Separately, Housing Starts rose 6.3% MoM to 1.643 million annualized pace, though failed to provide any meaningful impetus.

The pair was last seen trading just above the 1.2700 mark and remains at the mercy of the USD/oil price dynamics amid absent relevant market-moving economic releases, either from the US or Canada. Development surrounding the coronavirus saga will continue to play a key role in influencing the broader market risk sentiment and oil prices. On the other hand, the US bond yields will drive the intraday USD price action and further contribute to produce some trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the overnight pullback could be solely attributed to some long-unwinding amid slightly overbought RSI (14) on the daily chart. However, the fact that the pair this week surged past the very important 200-day SMA for the first time since July 2020 supports prospects for additional gains. From current levels, immediate resistance is pegged near the 1.2750-55 region, above which bulls are likely to make a fresh attempt to conquer the 1.2800 mark. Sustained strength beyond the mentioned handle will be seen as a fresh trigger for bullish traders and pave the way for a move beyond mid-1.2800s, towards testing the 1.2875-80 supply zone.

On the flip side, the overnight swing lows, around the 1.2675 region, now seems to protect the immediate downside. Any further pullback might still be seen as a buying opportunity near the 1.2625-20 area (200-day SMA), which should act as a strong near-term base for the major. A convincing breakthrough, leading to a subsequent fall below the 1.2600 mark, might trigger some technical selling and drag the pair towards intermediate support around the 1.2530 horizontal zone. This is followed by the key 1.2500 psychological mark and strong support near the 1.2475 region, which if broken decisively will shift the near-term bias in favour of bearish traders.