The USD/CAD pair rallied nearly 150 pips from the daily low and surged past the 1.2800 mark, hitting a fresh six-week high on Tuesday. The bets for a more aggressive policy tightening by the US central bank were reaffirmed by the recent hawkish comments by influential FOMC members, including Fed Chair Jerome Powell. The markets now expect the Fed to raise interest rates by 50 bps at each of its next four meetings in May, June, July and September. Apart from this, the deteriorating global economic outlook boosted the US dollar’s status as the reserve currency. The prospects for rapid interest rate hikes in the US, the prolonged Russia-Ukraine conflict and the latest COVID-19 outbreak in China have been fueling fears of stalling 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 behind the pair’s sharp intraday move up.
On the economic data front, the headline US Durable Goods Orders fell short of market expectations and increased by 0.8% MoM in March. This, however, marked a solid rebound from the previous month’s upwardly revised reading of -1.7%. Adding to this, orders excluding transportation items climbed 1.1% against 0.6% expected. This, to a larger extent, helped offset the ongoing pullback in the US Treasury bond yields and did little to dent the prevalent bullish sentiment surrounding the buck. The strong momentum also seemed rather unaffected by a goodish rebound in crude oil prices, which tend to underpin the commodity-linked loonie. China’s central bank said on Tuesday that it will step up prudent monetary policy support to negate any potential economic fallout from extended lockdowns across major centres in the country. Apart from this, geopolitical tensions provided modest lift to the black liquid.
Poland and Bulgaria – the two NATO and EU members – said that Russia will stop supplying gas on Wednesday. The development raised fears that Russia could follow through on its threat to halt gas flows to countries that refuse to pay for fuel in roubles and cut off supplies to Europe, which would impact the region’s economic growth. This, along with hopes for more Chinese economic stimulus, buoyed the oil demand outlook and extended some support to the Canadian dollar. Moreover, the USD seems to have entered a bullish consolidation phase, which, in turn, attracted some selling around the pair during the Asian session on Wednesday. Investors now look forward to second-tier US economic data for some impetus later during the early North American session. This, along with the broader market risk sentiment and the US bond yields, will influence the USD. Traders will further take cues from oil price dynamics to grab short-term opportunities.
From a technical perspective, the overnight strong rally beyond the 61.8% Fibonacci retracement level of the 1.2901-1.2403 downfall could be seen as a fresh trigger for bullish traders. Hence, any meaningful 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 zone. A convincing break below could drag spot prices back towards the 50% Fibo. level, around mid-1.2600s, which should now act as a pivotal point and strong near-term base.
On the flip side, sustained move beyond the multi-week high, around the 1.2825-1.2830 region, should allow bulls to aim back to conquer the 1.2900 round-figure mark, or the YTD peak touched in March. Some follow-through buying has the potential to lift the pair further towards December 2021 swing high, around the 1.2960-1.2965 zone, above which the momentum could further get extended towards the key 1.3000 psychological mark.