- USD/CAD continues to pull back from its two-year high and breaks a five-day winning streak.
- The recovery in oil prices benefits the CAD and puts pressure amid a modest decline in the USD.
- The fear of a recession and the expectations of an aggressive interest rate hike by the Fed act as a tailwind for the dollar and the pair.
The pair USD/CAD is under heavy selling pressure on Tuesday and pulls away from levels just above 1.3800, the highest since June 2020 played the day before. The pair, at the moment, seems to have broken a five-day winning streak and has fallen below 1.2650 during the European session.
Crude oil prices recover slightly from a multi-month low amid hurricane-induced supply disruptions and prop up the CAD, currency linked to raw materials. Elsewhere, the US dollar pauses in its recent recovery after hitting a two-decade high, which turns out to be another factor putting some downward pressure on the USD/CAD pair.
Risk appetite, represented by a positive tone around equity markets, triggers profit-taking around the safe-haven dollar. Apart from this, the decline in US Treasury yields seems to continue to weigh on the dollar, although the more aggressive stance taken by the Federal Reserve should help limit losses.
In fact, the US central bank signaled last week that it probably will carry out more aggressive rate hikes in its next meetings to control inflation. Furthermore, a couple of FOMC members reiterated on Monday that the priority remains to control domestic inflation. This should act as a tailwind for US bond yields.
On the other hand, the fear that a deeper economic recession affecting fuel demand should curb any significant rise in oil prices. On the other hand, the risk that the conflict between Russia and Ukraine will worsen favors the appearance of some purchases of dips around the safe-haven dollar and the USD/CAD pair.
From a technical point of view, the pullback seen from the 1.3800 high may signal the end of a bullish exhaustion move. This usually happens when price breaks out of a channel in the same direction it is trending – in the case of USD/CAD when it broke out of an already ascending channel. This may signal an acceleration of the trend before it reaches its high. It is still a bit early to say for sure if the uptrend has peaked, however, traders should keep an eye on this possibility. In reality, only price developments in the coming days and weeks will determine for sure whether or not 1.3800 represents a significant mid- to long-term top.
Market participants now await the Fed Chairman’s speech, Jerome Powell, at an event in Paris, which could influence the dollar. In addition, traders will reference the US economic docket, which will feature Durable Goods Orders, the Conference Board Consumer Confidence Index, New Home Sales and the Richmond Manufacturing Index.
This, coupled with US bond yields and broader risk sentiment, will drive demand for the dollar. In addition, the dynamics of oil prices could help generate opportunities in the short term. However, the fundamental background suggests that the path of least resistance for the USD/CAD pair is to the upside.
USD/CAD technical levels
Source: Fx Street
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