USD/CAD Forecast: Domestic data returns after external factors lift the loonie

• The Canadian Dollar staged a recovery thanks to rising oil prices and a falling US Dollar.
• Top-tier Canadian data to set the tone in the upcoming week.
• The technical picture is finely balanced.

USD/CAD turns down as the mood turns up

After suffering from multiple negative factors, the Canadian dollar received some help from external forces. The highly-anticipated US inflation report showed an acceleration in price rises, and the US Dollar initially rallied. The mood changed swiftly on various factors: a closer digest of the data and a rapid turnaround in share prices and the VIX volatility index. The USD sell-off that began on Wednesday extended through the end of the week. While commodity currencies lagged behind the Euro, Pound, and Yen, the loonie still rallied.

The tables have also turned for oil prices. Reports about a long-term agreement between Russia and OPEC sent prices higher. Markets ignored rising US oil production, and the weaker dollar also helped crude climb. The increase in the price of Canada's leading export gave another boost to the currency.

In Canada, ADP reported a small gain in jobs, 10,700 in a report that did not move markets that much. A speech by the BOC's Schembri also failed to move the needle.

The economic calendar sees the return of top-tier indicators in the upcoming week. Canada releases its Wholesale Sales on Tuesday and Retail sales on Thursday. The report is somewhat lagging: the data released now is for December. Nevertheless, it tends to have a significant market impact.

On Friday, the BOC publishes its monthly inflation report for January. Headline CPI rose by 1.9% in December, but Core inflation lagged behind. The Bank of Canada has already raised the interest rate once this year and the path of rate hikes remains uncertain, depending on the data. 

Here are the upcoming events that will move the Canadian dollar as they appear on the forex calendar:

US events: FOMC minutes, Fed speak

The Federal Reserve is at the center of attention in the upcoming week. The highlight is the release of the FOMC Meeting Minutes on Wednesday. The Fed made subtle hawkish changes to its statement in the January 31st meeting, the last presided by former Fed Chair Janet Yellen. The minutes may reveal how the Fed saw inflation developments back then.

Throughout the week, we will also hear from various Fed officials, and they will have the opportunity to comment on the latest inflation report, the weakness of the dollar and of course, the next moves in monetary policy. 

US economic indicators are few and far between, leaving the stage for the central bank.

Here are the critical American events from the economic calendar:

USD/CAD Technical Analysis

 The technical picture looks reasonably balanced. Momentum remains positive but has weakened. The has gently slipped under the 50-point mark, indicating a chance for a drop. The pair failed to stay above the 50-day Simple Moving Average and remains well below the 200-day SMA.

Examining the move from $1.2250 to $1.2682, the pair dropped below the 50% mark at $1.2460, but this breakout has not been confirmed. 

On the topside, the lines to watch are $1.2512 (38.2% Fib retracement), $1.2560 (mid-February high support), $1.2580 (23.6% Fib retracement) and $1.2682.

On the downside, the levels to eye are $1.2463 (50% Fib retracement), $1.2405 (61.8% Fib retracement), $1.2350 (Jan. 5 swing-low) and $.12250 (Feb. 2 low).

Where next for USD/CAD?

The Canadian dollar still looks vulnerable. It was unable to entirely change course despite various factors playing in its favor. The bias remains slightly tilted to the upside for USD/CAD. Canadian data will probably need to excel. Otherwise, the pair could resume its rise. 

. The FXStreet Forecast Poll shows a tendency for a bearish sentiment on the pair, contrary to the views expressed here.