USD/CAD Outlook: Bulls have the upper hand, US data/FOMC minutes eyed for fresh impetus

• USD/CAD corrected sharply from a near two-month high touched earlier on Tuesday.
• A strong intraday rally in crude oil prices benefitted the loonie and exerted pressure.
• Hawkish Fed expectations continued underpinning the USD and helped limit losses.

The USD/CAD pair witnessed an intraday turnaround and retreated around 85 pips from the vicinity of mid-1.2700s, or the highest level since September 30 touched earlier on Tuesday. WTI crude oil rallied over 4% from the $75.00 neighbourhood, which provided a goodish lift to the commodity-linked loonie and exerted pressure on the major. The strong move up in oil prices came after the US announced to release 50 million barrels of crude from the Strategic Petroleum Reserve. This was the first coordinated move with some of the world's largest oil consumers, like China, India, South Korea, Japan and Britain, in an attempt to cool oil prices. However, the fact that the landmark plan to tap strategic oil reserves was less severe than markets expected turned out to be a key factor that lifted the black gold.

On the other hand, the US dollar was seen consolidating its recent strong gains to a 16-month peak and did little to lend any support to the major. That said, a combination of factors continued acting as a tailwind for the greenback and helped limit losses for the major. Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. The market bets were boosted further after US President Joe Biden nominated Jerome Powell to serve as the Fed chairman for a second term. The fact that investors considered the other leading candidate, Lael Brainard, to be the more dovish of the two, the new reinforced expectations for an early policy tightening by the Fed. This was evident from a strong follow-through rally in the US Treasury bond yields.

In fact, the yield on the benchmark 10-year US government bond shot to the highest level since October 22, around 1.684%. Apart from this, concerns over the rising number of COVID-19 cases in Europe and the reimposition of lockdown measures underpinned the safe-haven greenback. This, in turn,  assisted the pair to regain positive traction during the Asian session on Wednesday and pushed the pair back closer to the 1.2700 mark. Market participants now look forward to the US economic docket, highlighting the release of the Prelim (second estimate) US Q3 GDP, Durable Goods Orders and Core PCE Price Index. This, along with the latest FOMC meeting minutes, will influence the USD and provide a fresh impetus. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the pair.

Technical outlook

From a technical perspective, the overnight corrective pullback attracted some dip-buying near the 61.8% Fibonacci level of the 1.2896-1.2288 downfall. The mentioned support, around the 1.2660 ara, should now act as a key pivotal point for intraday traders. A convincing break below could prompt some technical selling and accelerate the slide towards the 1.2600 mark, which coincides with the 50% Fibo. level. Some follow-through selling could shift the bias back in favour of bearish traders, turning the pair vulnerable to break through the 38.2% Fibo. level, around the 1.2515 region, and challenge the key 1.2500 psychological mark.

On the flip side, a sustained strength back above the 1.2700 mark should allow bulls to make a fresh attempt to conquer the 1.2745-50 supply zone and test the 1.2775 resistance. The momentum could further get extended towards reclaiming the 1.2800 mark en-route the next relevant hurdle near the 1.2825-30 region and September monthly swing high, around the 1.2900 round figure.