USD/CAD Forecast: 1.2600 mark holds the key for bulls amid rallying oil prices

• A combination of factors dragged USD/CAD to near two-week lows on Monday.
• Bullish oil prices underpinned the loonie; the risk-on mood weighed on the USD.
• Break below the 1.2600 mark could accelerate the fall towards the 200-day SMA.

The USD/CAD pair extended last week's sharp retracement slide from the vicinity of the 1.2900 mark and edged lower for the fifth successive session on Monday. The downward momentum was sponsored by a combination of factors and dragged the pair to near two-week lows during the Asian session. The ongoing bullish run in crude oil prices continued underpinning demand for the commodity-linked loonie. In fact, WTI crude oil rallied back closer to YTD tops touched in July amid signs of strengthening fuel demand and global supply concerns. On the other hand, the underlying bullish sentiment in the financial markets dented demand for the safe-haven US dollar.

Apart from this, a modest pullback in the US Treasury bond yields turned out to be another factor that weighed on the greenback. That said, worries about potential risks from the debt crisis at China Evergrande Group, along with prospects for an early rate hike by the Fed should help limit deeper USD pullback. It is worth recalling that the Fed's so-called dot plot indicated that policymakers were inclined to raise interest rates in 2022. This, in turn, pushed the yield on the benchmark 10-year US government bond beyond the 1.45% threshold for the first time since July on Friday, making it prudent to wait for a strong follow-through selling before placing fresh bearish bets.

Market participants now look forward to the US economic docket, highlighting the release of Durable Goods Orders. Apart from this, speeches by a slew of influential FOMC members, the US bond yields and the broader market risk sentiment will influence the greenback. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the major.

Technical outlook

From a technical perspective, sustained weakness below the 1.2600 mark would turn the pair vulnerable to challenge the very important 200-day SMA, currently around the 1.2520 region. This is closely followed by the key 1.2500 psychological mark, which if broken decisively will confirm a near-term bearish breakdown. The next relevant support is pegged near the 1.2430-25 region ahead of the 1.2400 mark. The downward trajectory could further get extended towards the 1.2310-1.2300 support with some intermediate support near the 1.2370-65 region.

On the flip side, the 1.2700 round-figure mark now seems to act as immediate strong resistance. Any subsequent move up might confront some hurdle near Friday's wing high, around the 1.2730 region, and the 1.2750-55 supply zone. A sustained move beyond now seems to pave the way for additional gains and lift the pair to the 1.2800 mark. Some follow-through buying beyond the 1.2825-30 region should allow bulls to aim back to conquer the 1.2900 round figure.