USD/CAD reaches 1.3495 but drops as Oil price recovers, amidst Fed hawkish rhetoric

• Loonie trimmed losses after the USD/CAD tested the 1.3495 two-week high.
• US Dollar was underpinned by risk aversion amidst growing concerns over China’s Covid-19 outbreak.
• Federal Reserve officials favor slowing rate hikes pace, but pausing is not an option.
• USD/CAD Price Analysis: Rejection at the head-and-shoulders neckline to exacerbate a fall toward 1.3300.

The Loonie (CAD) weakened against the US Dollar (USD) as market sentiment shifted sour on renewed fears over China’s Covid-19 outbreak, causing the death of three, sparking a flight to safety, while Covid cases topped April’s 2022 number. Additional factors like sliding crude Oil prices due to increasing production rumors, and overall US Dollar strength, weighed on the Loonie. Hence, the USD/CAD rallied towards the head-and-shoulders neckline, registering a new two-week high at 1.3495 before retracing to current exchange rates. At the time of writing, the USD/CAD trades at 1.3452.

Loonie weakens on sour sentiment due to China’s Covid-19 outbreak

Wall Street finished Monday’s session in the red. Increasing cases in China spurred risk aversion on speculations that Chinese authorities could reinstate restrictions. Covid-19 cases jumped in Beijing, while schools moved back to online education until further notice. It should be noted that Chinese authorities relaxed quarantine times for inbound travelers, cheered by investors, with equities extending their gains. Nevertheless, last week’s news, with Beijing, reporting more than 20,000 cases, weighed on risk-perceived currencies like the Loonie. Therefore, the USD/CAD edged toward the head-and-shoulders chart pattern neckline at around 1.3495.

Crude oil prices tumbled, weighing on the CAD

Additionally, the Loonie dropped, weighed by falling crude Oil prices, notably Western Texas Intermediate (WTI), on an article published by the Wall Street Journal (WSJ). The report cited delegates saying that Saudi Arabia is looking to boost Oil production by 500K BPD ahead of the Russian oil embargo imposed by European countries. Later, the Saudi Energy Minister Prince Abdulaziz bin Salman, denying those affirmations, commented, “if there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene.”

USD/CAD trimmed some of its earlier gains on those comments, retreating from 1.3495 towards 1.3431 before consolidating around 1.3450s ahead of Tuesday’s Asian session.

Federal Reserve officials underpinned the US Dollar

Elsewhere, Federal Reserve officials continued to express their commitment to cubing inflation toward their 2% goal. Still, they said that the pace of hikes could moderate as soon as the December meeting. However, St. Louis Fed President James Bullard spooked investors, saying rates are not “sufficiently restrictive” and adding that he expects the Federal Funds rate (FFR) to peak at around 5% to 5.25%. Echoing some of his comments was San Francisco’s Fed President Mary Daly, saying that policymakers need to be mindful of the lags of monetary policy. She added that she sees rates peaking at least at around 5%.

Of late, Cleveland’s Fed President Loretta Mester added herself to the chorus of officials that won’t slow down the rhythm of interest rate hikes while emphasizing that the “I don’t think we’re anywhere near to stopping,” pushing back against pausing.

Even though the US Dollar strengthened on those comments, the USD/CAD remained comfortably around the 1.3300-1.3400 range before climbing to new two-week highs

USD/CAD Price Analysis: Technical outlook

The USD/CAD daily chart portrays the head-and-shoulders chart pattern remains in play, albeit the pair edged toward the neckline around 1.3495. Once the price hit that threshold, Loonie buyers stepped in, dragging the USD/CAD lower, toward 1.3450s. At the same time, the Relative Strength Index (RSI) turned flat, at bearish territory, suggesting that even though the USD/CAD edged higher, sellers remain in charge.

Therefore, the USD/CAD first support would be 1.3400. Break below will expose the November 21 low at 1.3373, followed by the psychological 1.3300 mark. On the flip side, the USD/CAD key resistance levels are the head-and-shoulders neckline around 1.3500, followed by the 50-day Exponential Moving Average (EMA) at 1.3559, followed by 1.3600.