The market is likely to continue seeing a lot of noisy behavior, but ultimately the trend should prevail.
The US dollar fell a bit on Tuesday to reach down towards the 1.23 handle. However, we have turned around to form a bit of a hammer, and that does suggest that we will probably get a little bit of support. A bounce from here does make sense, but at the end of the day it is very likely that we will have a lot of resistance above, especially near the 1.25 handle. I believe at this point time this is more or less a bounce in a longer-term trend, especially as the crude oil market looks a little extended at the moment as well. Nothing has changed and I think that any rally will probably be sold into.
On the other hand, if we break down below the bottom of the candlestick for the trading session on Tuesday, it is likely that we could see even more downward pressure in a market that has been very negative for a while. At this point in time, I think it is probably easier to simply wait for some sign of exhaustion that you can start fading, as this market has been so negative for so long. It has been a straight run lower, which makes sense as the Canadian dollar is highly correlated to the crude oil market.
Furthermore, you have to pay close attention to the fact that both central banks are tightening, so there is no winner/loser in that particular argument. With that being the case, the market is likely to continue seeing a lot of noisy behavior, but ultimately the trend should prevail. The question now is whether or not the 1.20 handle will hold. If it does not, that could be very big for what happens next in this pair. On the other hand, if we turn around and take out the 200-day EMA at the 1.26 handle, I would consider that a major victory for the US dollar itself. At this point though, it simply makes no sense, as crude oil is at the beginning of a major move higher, and that should continue to the main driver of what happens next in this pair. Obviously, a major “risk off move” could happen, but right now it does not look likely.