USD/CAD Outlook: Bullish wedge breakout comes into play ahead of US Q4 GDP

• A combination of factors pushed USD/CAD to one-month tops on Thursday.
• The risk-off mood benefitted the safe-haven USD and remained supportive.
• Sliding oil prices undermined the loonie and provided an additional boost.
• The US Q4 GDP report will be looked upon for a fresh directional impetus.

The USD/CAD pair added to the previous day's strong momentum and climbed to one-month tops during the Asian session on Thursday. The US dollar was back in demand amid a fresh wave of the global risk aversion, which, in turn, was seen as one of the key factors driving the pair higher. Against the backdrop of growing market worries about the potential economic fallout from the coronavirus pandemic, doubts over the timing and size of a new US economic stimulus package dampened the market mood. This was evident from a selloff in the US equity markets, which forced investors to take refuge in the safe-haven greenback.

The USD bulls seemed rather unaffected by Wednesday's dovish sounding FOMC. As widely anticipated, the Fed left its monetary policy settings unchanged and downplayed speculations of tapering bond purchases sooner than expected. The US central bank, however, raised concerns about the pace of recovery and said that the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the outlook. Hence, the focus now shifts to Thursday's release of the Advance US Q4 GDP report, which will now play a key role in influencing the near-term USD price dynamics.

On the other hand, a softer tone surrounding crude oil prices undermined the commodity-linked loonie and provided an additional boost to the major. Oil prices remained depressed on the back of fresh concerns about weakening global fuel demand amid the reintroduction of strict COVID restrictions. The UK Prime Minister Boris Johnson indicated on Wednesday the lockdown in England would last until March 8 and also announced new measures to clamp down on travel to/from Britain. Adding to this, China – the world's second-largest oil consumer – also sought to limit Lunar New Year trips to stem a surge in COVID-19 cases.

Short-term technical outlook

From a technical perspective, the momentum pushed the pair beyond an important resistance marked by over two-month-old descending trend-line. The mentioned trend-line constituted the formation of a bullish falling wedge and a sustained breakthrough has already set the stage for additional gains. Hence, some follow-through strength beyond an intermediate resistance, near mid-1.2800s, looks a distinct possibility. The next relevant target on the upside is pegged near the 1.2900 mark ahead of late December swing highs, around the 1.2955 region.

On the flip side, the 1.2800 round-figure mark now seems to protect the immediate downside. Any subsequent fall might now be seen as a buying opportunity and remain limited near the wedge resistance breakpoint, around mid-1.2700s. That said, some follow-through weakness and failure to defend the 1.2700 mark will negate the constructive outlook. The pair might then turn vulnerable to resume its prior/well-established bearish trend.