Pullback could be seen as a buying opportunity, focus remains on FOMC

  • A combination of factors dragged USD/CAD further away from one-month tops touched on Monday.
  • The Canadian election results, rebounding oil prices underpinned the loonie and exerted pressure.
  • A recovery in the risk sentiment dented demand for the safe-haven USD and added to the selling bias.

The USD/CAD pair built on last week’s goodish rebound from the 1.2600 mark and gained strong follow-through traction on the first day of a new week. The momentum was sponsored by a combination of factors, albeit faltered near the 1.2900 round-figure mark. The US dollar remained well supported by firming market expectations for an imminent Fed taper announcement and further benefitted from the risk-off impulse in the markets. On the other hand, sliding crude oil prices undermined the commodity-linked loonie and provided an additional boost to the major.

Despite signs of easing inflationary pressures in the US, the incoming macro data pointed to the continuation of the economic recovery. The optimism now seems to have convinced investors that the Fed would begin rolling back its massive pandemic-era stimulus sooner rather than later. This, along with a looming China Evergrande default, took its toll on the global risk sentiment and forced investors to take refuge in the safe-haven greenback. However, a modest rebound in the US equity markets kept a lid on any further gains for the USD and prompted some selling around the pair.

The pair finally settled around 70 pips from the daily swing highs and retreated further during the Asian session on Tuesday, snapping three consecutive days of the winning streak. The outcome of Canadian federal elections, along with rebounding oil prices acted as a tailwind for the Canadian dollar. In fact, Canada’s ruling Liberal Party – led by Prime Minister Justin Trudeau – returned to power in a closely contested election, though failed to gain an absolute majority. Apart from this, a recovery in the risk sentiment weighed on the USD and exerted pressure on the pair.

The key focus, however, remains on the outcome of a two-day FOMC monetary policy meeting starting this Tuesday. Investors will look for clues about the likely timing of the Fed’s tapering plan, which will play a key role in influencing the USD and provide a fresh directional impetus to the major. In the meantime, the US housing market data and the broader market risk sentiment could drive demand for the safe-haven greenback. Traders might further take cues from oil price dynamics to grab some short-term opportunities around the major.

Technical outlook

From a technical perspective, last week’s sustained strength beyond the 1.2700 round figure marked a bullish breakout through a one-week-old trading range. Hence, any further pullback is more likely to find decent support and attract some buying near the mentioned resistance breakpoint, which should also act as a key pivotal point for traders. A convincing break below might turn the pair vulnerable to accelerate the slide back towards the 1.2625 intermediate support en-route the 1.2600 mark.

On the flip side, the 1.2800-1.2820 region now seems to act as an immediate resistance, above which bulls are likely to make a fresh attempt to conquer the 1.2900 mark. Some follow-through buying should pave the way for a move towards challenging YTD lows, around mid-1.2900s touched on August 20. The momentum could further get extended and assist the pair to aim to reclaim the key 1.3000 psychological mark. 

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