Canadian Dollar seems vulnerable as Iran diplomacy hopes weigh on oil prices

The USD/CAD pair attracts buyers for the third straight day and trades around the 1.4070-1.4075 area during the Asian session on Wednesday, near its highest level since July 29, touched the previous day. Moreover, the fundamental backdrop supports prospects for an extension of a strong uptrend witnessed over the past two weeks or so.

The recent sharp decline in crude oil prices continues to undermine the commodity-linked Loonie, which, along with a bullish US Dollar (USD) undertone, acts as a tailwind for the USD/CAD pair and validates the constructive outlook. In fact, West Texas Intermediate (WTI) – the benchmark US crude oil – dropped to an over two-week low on Tuesday amid reviving hopes for a diplomatic resolution to end the US-Iran war.

Adding to this, Iran reportedly offered to unblock the Strait of Hormuz in return for a US military de-escalation, further easing supply concerns as Saudi Arabia works to restore a key export route. Meanwhile, sliding oil prices alleviate immediate fears of runaway inflation and keep US bond yields depressed below multi-year highs. This might hold back USD bulls from placing fresh bets and cap the upside for the USD/CAD pair.

However, the USD Index (DXY), which tracks the Greenback against a basket of currencies, remains near its highest level since July 30, set on Tuesday, on the back of the Federal Reserve's (Fed) hawkish outlook. In fact, the US central bank delivered its first interest rate increase in three years and signaled one more hike this year. This, in turn, suggests that the path of least resistance for the buck and the USD/CAD pair remains to the upside.

USD/CAD daily chart

Technical Analysis

The USD/CAD sits above the 38.2% and 50.0% Fibonacci retracement levels and extends its advance after reclaiming the 61.8% retracement. This gives spot prices a bullish near-term bias and back the case for additional gains to the next relevant hurdle at the 78.6% retracement at 1.4137, ahead of the cycle high at 1.4246.

On the downside, initial support is located at the 61.8% retracement at 1.4051, followed by the 50.0% level at 1.3991 and the 38.2% retracement at 1.3931, where buyers could attempt to defend the recent upswing.