USD/CAD Forecast: Seems vulnerable near multi-month low, 200-day SMA breakdown in play

The USD/CAD pair remains under some selling pressure for the fifth successive day on Thursday and languishes near its lowest level since April 10, around the 1.3585-1.3580 region during the early European session. The Canadian Dollar (CAD) continues to attract flows in the wake of the recent narrowing of the gap between Canada's 2-year rate and the US equivalent. Investors now seem convinced that the Federal Reserve (Fed) will join the Bank of Canada (BoC) in an aggressive policy easing cycle and have been pricing in the possibility of a larger-than-normal rate cut in September. 

In fact, the CME Group's FedWatch Tool indicates a 38% probability of a 50 basis points (bps) rate cut next month, up from 29% a day before, and about 100 bps worth of easing by the end of this year. The bets were lifted by a report on Wednesday, which suggested that the labor market was not as strong as estimated. The preliminary annual benchmark review of employment report published by the US Bureau of Labor Statistics showed that US employers added 818,000 fewer jobs than were reported during the year through March. This supports prospects for lower US interest rates. 

Adding to this, the minutes of the July 30-31 FOMC meeting revealed that a vast majority of officials backed the case for an interest rate cut in September, with some policymakers leaning toward immediate action. This helps offset bearish Crude Oil prices, which tends to undermine the commodity-linked Loonie, and turns out to be a key factor dragging the USD/CAD pair lower. Despite the risk of a broader conflict in the Middle East, worries about the global demand outlook keep the black liquid depressed near its lowest level since February touched earlier this month.

Furthermore, a modest US Dollar (USD) bounce from the YTD low touched on Wednesday fails to lend any support to the USD/CAD pair. Market participants now look to the US economic docket – featuring the release of the usual Weekly Initial Jobless Claims and Existing Home Sales data. The focus, however, remains on Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday, which will be scrutinized for clarity if a softer US labor market backs the case for a larger interest rate cut next month. This, in turn, will drive the USD demand in the near term.

Technical Outlook

From a technical perspective, the overnight breakdown and close below the very important 200-day Simple Moving Average (SMA), for the first time since March, was seen as a fresh trigger for bearish traders. That said, the Relatively Strength Index (RSI) on the daily chart has just started drifting in the oversold zone. This makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for any further depreciating move. 

Any attempted recovery, however, is more likely to confront stiff resistance near the 1.3600 mark, or the 200-day SMA support breakpoint. Moreover, a subsequent move up could be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.3645-1.3650 region. The latter should act as a key pivotal point, which if cleared decisively might prompt some short-covering move and pave the way for some meaningful upside for the USD/CAD pair.

On the flip side, the 1.3535 horizontal zone could offer some support ahead of the 1.3500 psychological mark. Some follow-through selling will set the stage for an extension of the recent sharp retracement slide from the vicinity of mid-1.3900s, or the highest level since October 2022 touched at the start of the current month. The USD/CAD pair might then accelerate the fall towards the 1.3460 area, en route to the March swing low, around the 1.3420 region, and the 1.3400 round figure. 

USD/CAD daily chart