USD/CAD Forecast: Bulls remain on the sidelines ahead of the crucial US CPI on Tuesday

The USD/CAD pair struggles to capitalize on Friday's goodish bounce from the 1.3420 region, or a nearly one-month trough and kicks off the new week on a subdued note, oscillating in a narrow range through the early European session. Crude Oil prices reverse an intraday dip to a two-week low amid persistent geopolitical risks stemming from conflicts in the Middle East and the Russia-Ukraine war. This, in turn, lends some support to the commodity-linked Loonie and acts as a headwind for the currency pair. That said, concerns about slowing demand in China, exacerbated by underwhelming import data for the first two months of 2024 and mixed inflation data, should cap any meaningful upside for the black liquid.

Meanwhile, data released on Friday showed that wage growth in Canada slowed for a second consecutive month in February and pointed to easing inflationary pressures ahead. Adding to this, the unemployment rate rose to 5.8% and overshadowed the upbeat headline print, showing that the Canadian economy added 41K jobs in February, which, in turn, is seen undermining the Canadian Dollar (CAD). From the US, the Nonfarm Payrolls (NFP) rose by 275K in February against 200K expected. The previous month's reading, however, was revised down to 229K from 353K reported and the jobless rate climbed to 3.9%, or the highest level in two years, lifting bets for an imminent shift in the Federal Reserve's (Fed) policy shift.

Investors now seem convinced that the US central bank will start cutting interest rates at the June policy meeting. This drags the yield on the benchmark 10-year US government bond to a more than one-month low, which fails to assist the USD to build on its recovery from the lowest level since mid-February and contributes to the USD/CAD pair's range-bound price action. Traders also seem reluctant to place aggressive directional bets and prefer to wait on the sidelines ahead of the release of the latest US consumer inflation figures on Tuesday. The crucial US CPI report will play a key role in influencing expectations about the Fed's rate-cut path, which, in turn, will drive the USD demand and provide a fresh impetus to the major.

Technical Outlook

From a technical perspective, Friday’s rebound validated a support marked by the lower end of a two-month-old upward-sloping channel. The lack of follow-through buying beyond the 200-day Simple Moving Average (SMA), however, warrants some caution for bullish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for spot prices is to the downside.

 Some follow-through selling below the 1.3455 immediate support will reaffirm the negative outlook and drag the USD/CAD pair back towards the trend-channel support, currently near the 1.3420 region. A sustained weakness below, leading to a subsequent break through the 1.3400 mark, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses. Spot prices might then accelerate the fall towards the 1.3360 intermediate support before eventually dropping to the 1.3300 round figure.

On the flip side, the 1.3500 psychological mark is likely to act as an immediate strong barrier ahead of the 100-day SMA, currently around the 1.3530 region. A sustained strength beyond might prompt a short-covering rally and allow the USD/CAD pair to make a fresh attempt towards conquering the 1.3600 mark. The latter coincides with the ascending channel resistance, which if cleared decisively might shift the bias in favour of bullish traders.