Canadian Dollar pulls back from two-month top as rebounding USD counters higher oil prices

The USD/CAD pair attracts some dip-buyers at the start of a new week and recovers a part of Friday's heavy losses to the 1.3925 area, or a nearly two-month low. Spot prices climb back above mid-1.3900s during the Asian session, though the upside potential seems limited amid a combination of diverging forces.

As investors look past Friday's disappointing US Nonfarm Payrolls (NFP) report, the US-Iran standoff keeps the geopolitical risk premium in play and acts as a tailwind for the safe-haven US Dollar (USD). Furthermore, bets that the US Federal Reserve (Fed) will raise borrowing costs by the end of this year amid inflation risks stemming from recovering crude oil prices lend support to the Greenback and the USD/CAD pair.

Meanwhile, uncertainties surrounding the reopening of the Strait of Hormuz remain supportive of a bid tone surrounding crude oil prices, which is seen underpinning the commodity-linked Loonie. The Canadian Dollar (USD) could further benefit from the upbeat domestic jobs report, released on Friday. This, in turn, might hold back traders from placing aggressive bullish bets on the USD/CAD pair and cap any meaningful gains.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent pullback from the vicinity of mid-1.4200s, or the year-to-date high touched in June, has run its course and positioning for further upside. Traders might also opt to wait for this week's release of US inflation figures. Moreover, further developments surrounding the Middle East crisis will be looked upon for some impetus.

USD/CAD daily chart

Technical Analysis:

The USD/CAD pair’s ability to stay above the 100-day Simple Moving Average (SMA) at 1.3917 suggests underlying demand is still cushioning pullbacks, even as upside momentum appears measured. A break would expose a deeper correction. On the flip side, traders may look to psychological round figures and recent swing highs to define the next topside hurdles as long as spot prices hold above the 100-day SMA.