USD/CAD Forecast: Seems vulnerable near multi-week low ahead of Canadian CPI

The USD/CAD pair turns lower for the third straight day on Tuesday and drops to a five-week low, around the 1.3625-1.3625 area during the early part of the European session, though lacks follow-through. The selling bias around Crude Oil prices remains unabated for the third successive day amid hopes of a ceasefire in Gaza, which is seen undermining the commodity-linked Loonie and acting as a tailwind for the currency pair. In fact, US Secretary of State Antony Blinken said on Monday that Israeli Prime Minister Benjamin Netanyahu had accepted a bridging proposal to tackle disagreements blocking a ceasefire deal and also urged Hamas to do the same. This helps ease worries about a broader conflict in the Middle East and supply disruptions from the key Oil producing region. 

Furthermore, concerns about an economic slowdown in China – the world's largest importer of Oil – drag the black liquid to a nearly two-week low. Apart from this, a modest US Dollar (USD) recovery from the lowest level since January turns out to be another factor lending support to the USD/CAD pair. The upside for the Greenback, however, remains capped in the wake of dovish Federal Reserve (Fed) expectations. In fact, the CME Group’s FedWatch Tool indicates a greater chance that the Fed will begin its rate-cutting cycle at the September policy meeting and lower borrowing costs by over 200 basis points by the end of 2025. The bets were reaffirmed by dovish remarks by Fed officials, which might keep a lid on any meaningful gains for the USD and the currency pair. 

Chicago Fed President Austan Goolsbee said the US economy is not showing signs of overheating, so central bank officials should be wary of keeping restrictive monetary policy in place longer than necessary. Separately, San Francisco Fed President Mary Daly downplayed concerns about a sharp US economic slowdown, though said that the US central bank needs to take a gradual approach towards lower borrowing costs. Furthermore, Minneapolis Fed President Neel Kashkari said on Monday that a debate about potentially cutting the policy rate in September is an appropriate one to have as the balance of risk has shifted more towards the labor market. This, in turn, warrants some caution for the USD bulls and before confirming that the USD/CAD pair has bottomed out.

Traders might also prefer to wait for more cues about the Fed's rate-cut path before placing aggressive directional bets. Hence, the focus remains on the release of the July FOMC meeting minutes, which, along with Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday, will drive the USD demand and provide some meaningful impetus to the USD/CAD pair. In the meantime, Tuesday's release of the latest consumer inflation figures from Canada will be looked upon for short-term trading opportunities. The expected fall in the headline Canadian CPI for the second straight month might allow the Bank of Canada (BoC) to pursue a more accommodative policy, which should weigh on the Canadian Dollar (CAD) and assist the USD/CAD pair to register a meaningful recovery. 

Technical Outlook

From a technical perspective, the recent breakdown through the 1.3725 confluence support – comprising the 50-day SMA and the 61.8% Fibonacci retracement level of the July-August rally – was seen as a key trigger for bearish traders. Moreover, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for the USD/CAD pair remains to the downside. Hence, a subsequent fall back towards testing sub-1.3600 levels, or the July monthly swing low, looks like a distinct possibility. The latter is near the very important 200-day SMA, below which the downward trajectory could extend further towards the 1.3500 psychological mark.

On the flip side, any recovery beyond the 1.3650 area is likely to attract fresh sellers and remain capped ahead of the 1.3700 round-figure mark. This is followed by the 1.3725 confluence support breakpoint, which if cleared decisively might trigger a short-covering rally. The USD/CAD pair might then climb to the 1.3765-1.3770 intermediate hurdle and aim to reclaim the 1.3800 mark. The recovery momentum could extend further towards the 1.3845-1.3850 region en route to the 1.3875-1.3880 region. Some follow-through buying will shift the bias back in favor of bullish traders and lift spot prices beyond the 1.3900 round figure, towards the YTD peak, around the 1.3945 zone touched earlier this month.

USD/CAD daily chart