USD/CAD Forecast: Bulls look to seize control near 50% Fibo., move beyond monthly peak awaited

• USD/CAD scales higher for the third straight day and inches back closer to the monthly peak.
• Hawkish Fed expectations and recession fears continue to benefit the safe-haven greenback.
• Softer crude oil prices undermine the loonie and remain supportive ahead of Canadian data.

The USD/CAD pair gains traction for the third successive day and climbs back closer to the monthly peak during the Asian session on Friday. This also marks the fifth day of a positive move in the previous six and is sponsored by sustained US dollar buying. Firming expectations that the Fed would stick to its policy tightening path continues to lend support to the greenback and lifts it to a one-month high on the last day of the week. The FOMC minutes released on Wednesday indicated that policymakers remain committed to raising interest rates to tame inflation. The bets were reaffirmed by this week's mostly upbeat US macro data and the recent hawkish remarks by several Fed officials.

On Thursday, the US published Initial Jobless Claims, which declined more-than-anticipated to 250K last week. Furthermore, the Philly Fed Manufacturing Index jumped to 6.2 in August, surpassing estimates for an improvement to -5 from the -12.3 previous. This comes on the back of Wednesday's upbeat consumer spending data and reinforced hawkish Fed expectations. Adding to this, San Francisco Fed President Mary Daly noted that the US inflation rate is too high and a 50 or 75 bps rate increase would be appropriate at the September FOMC meeting. Separately, St. Louis Fed President James Bullard said that given the strength of the economy, he is leaning toward a third straight 75 bps rate hike next month.

This, in turn, remains supportive of elevated US Treasury bond yields. Apart from this, the prevalent cautious mood - amid growing recession fears - further seems to benefit the safe-haven greenback. Meanwhile, concerns that a global economic downturn would hurt fuel demand keep a lid on the overnight strong recovery in crude oil prices from a multi-month low. This, in turn, underpins the commodity-linked loonie and provides an additional lift to the USD/CAD pair. In the absence of any market-moving economic data from the US, traders on Friday would take cues from Canadian Retail Sales figures. This, along with the USD/oil price dynamics, might produce short-term trading opportunities.

Technical Outlook

From a technical perspective, the monthly swing high, around the 1.2980-1.2985 region, coincides with the 50% Fibonacci retracement level of the July-August downfall. This is closely followed by the 1.3000 psychological mark, which if cleared decisively would be seen as a fresh trigger for bullish traders. The USD/CAD pair could then climb to the 61.8% Fibo. level, around the 1.3035 zone and extend the momentum further towards the next relevant hurdle near the 1.3080 horizontal level. Some follow-through buying has the potential to lift spot prices beyond the 1.3100 mark, towards the recent daily closing highs, around the 1.3115 area.

On the flip side, the 38.2% Fibo. level, nearing the 1.2930-1.2920 horizontal resistance breakpoint, now seems to protect the immediate downside ahead of the 1.2900 round-figure mark. Any further decline is more likely to find decent support and remain limited near the 23.6% Fibo. level, around the 1.2845-1.2840 region. Failure to defend the said support level, leading to a subsequent break below the 100-day SMA, currently around the 1.2815 area, would negate any near-term positive bias. The USD/CAD pair would then turn vulnerable to accelerate the slide back towards the 1.2760 intermediate support en route to the monthly low, around the 1.2730-1.2725 area touched last week.