• USD/CAD dropped to two-month lows and was pressured by a combination of factors.
• Slightly oversold RSI (14) on the 4-hour chart held trades from placing aggressive bets.

The USD/CAD pair remained on the defensive through the first half of the European session and was last seen trading around mid-1.2400s, or the lowest level since late July.

An extension of the recent bullish run in crude oil prices continued underpinning the commodity-linked loonie and exerted some pressure on the USD/CAD pair. That said, a modest US dollar strength – amid firming expectations for an imminent Fed taper announcement – helped limit any deeper losses, at least for the time being.

From a technical perspective, the USD/CAD pair, so far, has managed to defend a support marked by the lower boundary of a three-week-old descending channel. However, Friday's sustained break through the very important 200-day SMA and acceptance below the 1.2500 psychological mark supports prospects for a further near-term decline.

Meanwhile, technical indicators on the daily chart maintained their bearish bias and are still far from being in the oversold territory, adding credence to the negative outlook. That said, RSI (14) on the 4-hour chart is hovering below the 30 mark, which seemed to be the only factor that held traders from placing fresh bearish bets.

Hence, it will be prudent to wait for a convincing break below the trend-channel support, around the 1.2425 region before positioning for any deeper pullback amid a bank holiday in the US and Canada. The USD/CAD pair might then turn vulnerable and break below the 1.2400 mark, towards testing the next relevant support near the 1.2320-15 area.

On the flip side, any attempted recovery move might now confront stiff resistance near the 1.2500 mark. This is closely followed by the 200-day SMA support breakpoint, around the 1.2510 region, which if cleared decisively might trigger a short-covering move and allow bulls to aim back to reclaim the 1.2600 mark.

The momentum could further get extended towards the descending trend-channel resistance, currently near mid-1.2600s. The latter should act as a key pivotal point for short-term traders. A sustained move beyond will negate any negative bias and shift the near-term bias in favour of bullish traders.

USD/CAD 4-hour chart

Technical levels to watch