USD/CAD Outlook: Bulls show some resilience below 1.2800 mark ahead of Canadian CPI

• USD/CAD settled in the red for the third straight day on Tuesday amid broad-based USD weakness.
• Aggressive Fed rate hike bets, recession fears limited the USD losses and extended support to the pair.
• Investors now look forward to the Canadian consumer inflation figures for some meaningful impetus.

The USD/CAD pair prolonged its recent pullback from the highest level since November 2020 touched last week and remained depressed for the third successive day on Tuesday. A general improvement in global risk sentiment - as depicted by the overnight rally in the equity markets - dragged the safe-haven US dollar away from a two-decade high. This, in turn, was seen as a key factor that exerted some pressure on the major, though weaker crude oil prices undermined the commodity-linked loonie and helped limit the downside.

Oil prices retreated sharply from a seven-week high amid a further delay in the approval of the Eurozone's proposed ban on Russian oil. Apart from this, concerns about faltering fuel demand - amid the latest COVID-19 lockdowns in China and worsening global economic outlook - further weighed on the black liquid. The intraday selling picked up pace after reports indicated that the United States could ease some restrictions on Venezuela's government. This, in turn, raised hopes for some additional supplies in the markets.

On the economic data front, the headline US Retail Sales recorded a robust growth of 0.9% in April and the previous month's reading was also revised up to show a gain of 1.4%, double than the 0.7% initially reported. Excluding food and energy costs, core retail sales grew more than expected, by 0.6% during the reported month, though did little to impress the USD bulls. Nevertheless, the data was strong enough to reaffirm market expectations that the Fed would stick to its monetary policy tightening path over the next few months.

The bets were reinforced by Fed Chair Jerome Powell's remarks at a Wall Street Journal event, saying that he will back interest rate increases until prices start falling back toward a healthy level. This, along with a fresh leg up in the US Treasury bond yields, acted as a tailwind for the buck. The pair, however, settled near the lower end of its daily trading range and touched a two-week low during the Asian session on Wednesday. That said, the emergence of some USD buying assisted spot prices to rebound from sub-1.2800 levels.

The attempted recovery move lacked follow-through buying and ran out of steam near the 1.2840 region. Traders now seem reluctant to place aggressive bets and preferred to wait on the sidelines ahead of the Canadian consumer inflation figures. The US economic docket features Building Permits and Housing Starts data. This, along with the US bond yields and the broader market risk sentiment will influence the USD. Traders will further take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair.

Technical outlook

From a technical perspective, the early uptick on Wednesday faltered near the 38.2% Fibonacci retracement level of the recent rally witnessed over the past one month or so. This, in turn, favours bearish traders and supports prospects for a slide towards testing the 50% Fibo. level, around the 1.2765 region. Some follow-through selling should pave the way for additional losses and drag spot prices further towards the 1.2700 round-figure mark. The latter nears the 61.8% Fibo. level and should act as a pivotal point to determine the next leg of a directional move for the USD/CAD pair.

On the flip side, bulls might now wait for a move above the daily high, around the 1.2840 region (38.2% Fibo. level) before placing fresh bets. The pair might then aim to surpass the 1.2900 mark and test the next relevant hurdle near the 1.2930 zone, or the 23.6% Fibo. level. Sustained strength beyond will suggest that the corrective pullback has run its course and shift the bias back in favour of bullish traders. The subsequent move up could then lift the USD/CAD pair back towards the 1.3000 psychological mark.