USD/CAD Outlook: Bulls retain control near two-year high, ascending channel breakout in play

• USD/CAD witnessed an intraday pullback from over a two-year high touched on Thursday.
• An uptick in oil prices underpinned the loonie and exerted pressure amid a sharp USD fall.
• Hawkish Fed expectations, recession fears act as a tailwind for the buck and limit losses.
• Traders now eye Canadian Retail Sales, US PMIs for some impetus ahead of Fed’s Powell.

The USD/CAD pair witnessed good two-way price moves on Thursday and was influenced by a combination of diverging forces. Russia announced an immediate partial military mobilization and raised the risk of a further escalation in the conflict with Ukraine, fueling supply concerns. This, in turn, provided a modest lift to crude oil prices, which underpinned the commodity-linked loonie. Apart from this, a sharp US dollar pullback from a two-decade high prompted some intraday selling around the major.

The sharp USD downfall was sponsored by a massive rally in the Japanese yen that followed news that the Japanese government has intervened in the forex market. That said, a more hawkish stance adopted by the Fed, signalling large rate hikes at its upcoming meetings, acted as a tailwind for the greenback. Apart from this, the prevalent risk-off mood assisted the safe-haven buck to recover a major part of its intraday losses and assisted the USD/CAD pair to find decent support near the 1.3400 mark.

The market sentiment remains fragile amid worries that rapidly rising borrowing costs will lead to a deeper global economic downturn. Furthermore, China's zero-covid policy adds to a deteriorating fuel demand outlook and exerts fresh downward pressure on crude oil prices. The USD, on the other hand, draws support from a further rise in the US Treasury bond yields. This, in turn, allows the USD/CAD pair to hold steady near the 1.3500 psychological mark through the Asian session on Friday.

Market participants now look forward to the Canadian monthly Retail Sales data, which, along with the flash US PMI prints, could provide some impetus to the USD/CAD pair. The focus, however, will remain on Fed Chair Jerome Powell's speech at an event in Washington, which will play a key role in driving the USD demand. Apart from this, traders will take cues from the broader risk sentiment and oil price dynamics to grab short-term opportunities on the last day of the week.

Technical Outlook

From a technical perspective, this week's breakout through a resistance marked by the top end of a multi-month-old ascending channel favours bullish traders. The emergence of some dip-buying on Thursday adds credence to the constructive outlook and supports prospects for additional gains. Hence, a move back towards the overnight swing high, around the 1.3545 region, en route to the 1.3600 round-figure mark, remains a distinct possibility. That said, technical indicators on the daily chart are already flashing overbought conditions and warrant some caution.

On the flip side, the ascending channel resistance breakpoint, currently around the 1.3425-1.3420 area, now seems to protect the immediate downside ahead of the 1.3400 mark. Any subsequent fall could be seen as a buying opportunity and remain limited near the 1.3345 region. A convincing break below the latter might prompt some technical selling and make the USD/CAD pair vulnerable to weaken further below the 1.3300 mark. The corrective decline could get extended towards another strong resistance breakpoint, now turned support near the 1.3220-1.3210 zone, which should now act as a strong base for spot prices.