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USD/CAD Outlook: Overnight pullback warrants caution for bulls amid rallying oil prices

  • USD/CAD witnessed a turnaround of over 100 pips from a one-week high touched on Thursday.
  • Bullish crude oil prices underpinned the loonie and prompted fresh selling around the major.
  • Hawkish Fed, rising US bond yields acted as a tailwind for the USD, though failed to impress bulls.
  • Investors now eye the closely-watched US/Canadian monthly jobs data for some trading impetus.

The USD/CAD pair shot to a one-week high on Thursday, albeit struggled to capitalize on the move or find acceptance above the 1.2800 mark and witnessed an intraday turnaround of over 100 pips. A fresh leg up in crude oil prices underpinned the commodity-linked loonie. This, in turn, was seen as a key factor that prompted fresh selling around the major amid subdued US dollar price action. The ongoing protests in Kazakhstan fueled fears of a disrupted crude supply from the OPEC+ producer. Apart from this, supply outages in Libya due to pipeline maintenance work pushed oil prices to the highest level since mid-November.

On the other hand, signs of stability in the financial markets undermined the safe-haven US dollar, which was further weighed down by disappointing macro data. In fact, the US Initial Weekly Jobless Claims rose to 207K last week and the ISM Services PMI dropped sharply from 69.1 to 62.0 in December. That said, the Fed's hawkish outlook, along with rising US Treasury bond yields helped limit the USD losses. It is worth recalling that the December 14-15 FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates earlier than anticipated to combat high inflation.

The markets were quick to price in a roughly 80% chance of a 25 bps Fed hike in March 2022. The expectations were reinforced by comments by St. Louis Fed James Bullard, saying that the FOMC could begin increasing the policy rate as early as the March meeting to control inflation. Separately, San Francisco Fed President Mary Daly said that the US central bank will likely need to raise interest rates in order to keep the economy in balance. The big shift in the policymakers' tone pushed the yield on the benchmark 10-year US government bond to the highest level since October and extended some support to the greenback.

Nevertheless, the pair ended the day in the red and remained on the defensive for the second successive session on Friday amid a further rise in crude oil prices. Market participants now look forward to the closely-watched monthly jobs report from the US (NFP) and Canada, due later during the early North American session. Apart from this, the US bond yields, will influence the USD and provide some impetus to the major. Traders will further take cues from oil price dynamics to grab some short-term opportunities on the last day of the week.

Technical outlook

From a technical perspective, the pair stalled this week's goodish rebound from a multi-week low stalled near a resistance marked by the 23.6% Fibonacci level of the 1.2288-1.2964 strong move up. The mentioned barrier, around the 1.2810-15 region, should now act as a key pivotal point for short-term traders. A sustained strength beyond has the potential to lift the pair towards the 1.2860 horizontal resistance en-route the 1.2900 mark. The momentum could further get extended towards the next relevant hurdle near the 1.2940-50 region.

On the flip side, any meaningful slide below the 1.2700 mark might continue to find decent support near the 1.2630-25 confluence, comprising 100-day SMA and the 50% Fibo. level. A convincing break below will negate any near-term positive bias and turn the pair vulnerable to break below the 1.2600 mark. The downward trajectory could drag spot prices to the 1.2540 area (61.8% Fibo.), below which bears could aim to challenge the key 1.2500 psychological mark.

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Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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