Bulls have the upper hand, could still aim to conquer the 1.2900 mark

  • USD/CAD caught aggressive offers on Tuesday and rallied to a new multi-week high.
  • Bets for more aggressive Fed rate hikes, global growth concerns benefited the USD.
  • A solid comeback by oil prices did little to support the loonie and curb its advance.

USD/CAD rebounded almost 150 pips from the daily low and broke above the 1.2800 mark, hitting a new six-week high on Tuesday. Bets for more aggressive US central bank policy tightening have been reaffirmed by recent hawkish comments from influential FOMC members, including Fed Chairman Jerome Powell. Markets now expect the Fed to raise interest rates by 50 basis points at each of its next four meetings in May, June, July and September. Apart from this, the deteriorating global economic outlook has bolstered the status of the US dollar as a reserve currency. Prospects for rapid interest rate hikes in the United States, the protracted conflict between Russia and Ukraine and the latest COVID-19 outbreak in China have fueled fears of slowing global growth. The combination of factors pushed the USD index to its highest level since March 2020, which, in turn, was seen as a key factor in the pair’s strong intraday rise.

On the economic data front, major durable goods orders in the United States came in below market expectations and rose 0.8% month-on-month in March. This, however, marked a solid rebound from the previous month’s upward-revised reading of -1.7%. Added to this are orders excluding transport, which increased by 1.1% against 0.6% expected. This, to a greater extent, helped offset the continued decline in US Treasury bond yields and did little to shake the prevalent bullish sentiment around the dollar. The strong momentum also seemed rather spared by a nice rebound in crude oil prices, which tend to support the commodity-linked loonie. China’s central bank said on Tuesday it would step up cautious monetary policy support to negate any potential economic fallout from a prolonged lockdown in major centers across the country. Apart from that, geopolitical tensions have provided a modest boost to the black liquid.

Poland and Bulgaria – both NATO and EU members – said Russia would stop gas supplies on Wednesday. This development has raised fears that Russia will follow through on its threat to stop gas flows to countries that refuse to pay for fuel in rubles and to cut off supplies to Europe, which would have an impact on the economic growth in the region. This, combined with hopes of Chinese economic stimulus, has bolstered the oil demand outlook and extended some support for the Canadian dollar. Additionally, the USD appears to have entered a bullish consolidation phase, which in turn attracted selling around the pair in Wednesday’s Asian session. Investors are now eagerly awaiting second-tier US economic data for some momentum later in the first North American session. This, along with general market risk sentiment and US bond yields, will influence the USD. Traders will further take inspiration from the momentum of oil prices to capture short-term opportunities.

Technical outlook

From a technical standpoint, overnight’s strong rally past the 61.8% Fibonacci retracement level of the fall from 1.2901-1.2403 could be seen as a new trigger for bullish traders. . Therefore, any significant pullback could still be seen as a buying opportunity near the 1.2765-1.2755 region. This, in turn, should help limit the downside near the 1.2710-1.2700 area. A convincing break below could bring spot prices back towards 50% Fibo. level, around the midpoint of 1.2600, which should now act as a pivot point and a strong base in the near term.

On the other hand, a sustained move beyond the multi-week high around the 1.2825-1.2830 region should allow the bulls to re-aim to conquer the 1.2900 mark, or the peak reached in March. Some follow-on buying has the potential to lift the pair towards the December 2021 high around the 1.2960-1.2965 area, above which momentum could further extend towards the key psychological mark of 1.3000.

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