USD/CAD Outlook: Bulls need to wait for sustained strength beyond 1.3800 mark

• USD/CAD scales higher for the second straight day amid bearish Crude Oil prices.
• Bets that the Fed is done hiking interest rates weigh on the USD and cap the upside.
• The mixed fundamental backdrop warrants caution for aggressive bullish traders.

The USD/CAD pair attracts some buyers for the second successive day, albeit remains below the overnight swing high through the early part of the European session. The recent slump in Crude Oil prices to over a four-month trough touched on Thursday continues to undermine the commodity-linked Loonie, which, in turn, is seen as a key factor acting as a tailwind for the major. The US Dollar (USD), on the other hand, continues with its struggle to register any meaningful recovery from its lowest level since September 1 touched in reaction to softer US consumer inflation figures on Tuesday and caps gains for spot prices.

Data released by the Energy Information Agency showed on Wednesday that US crude inventories rose by 3.6 million barrels last week while production held steady at a record 13.2 million barrels per day. This triggered concerns about weak demand in the world's largest oil consumer. Furthermore, China's crude refining throughput slowed 2.8% in October to 15.1 million barrels per day from a record high in September, suggesting slowing demand in the world’s second-largest economy. This, along with worries that a deeper global economic downturn will dent demand, offsets OPEC supply cuts and continues to weigh on the commodity.

Meanwhile, lacklustre US macro data released this week, including the softer October CPI and PPI figures, reinforced the view that the Federal Reserve’s (Fed) tightening cycle is over. Furthermore, bearish Oil prices could have a disinflationary effect, which should bring the Federal Reserve (Fed) closer to its 2% target and allow it to soften its hawkish stance. In fact, the markets are starting to look forward to rate cuts, perhaps in the first half of 2024. The dovish outlook drags the benchmark 10-year US Treasury yield to a more than two-month low, which keeps the USD depressed and might cap the upside for the USD/CAD pair.

The aforementioned mixed fundamental backdrop warrants some caution before positioning for an extension of this week's goodish rebound from the 50-day Simple Moving Average (SMA) support. Nevertheless, spot prices, for now, seem to have reversed a major part of the weekly losses as traders now look to the US housing market data for a fresh impetus. Traders will further take cues from a scheduled speech by Chicago Fed President Austan Goolsbee, which, along with the US bond yields and the broader risk sentiment, will drive demand for the safe-haven USD and produce short-term opportunities around the USD/CAD pair.

Technical Outlook

From a technical perspective, this week's bounce from the 50-day SMA support and the subsequent move up favours bullish traders. Adding to this, oscillators on the daily chart have just started gaining positive traction and support prospects for a further near-term appreciating move. That said, it will still be prudent to wait for sustained strength and acceptance above the 1.3800 mark before placing fresh bullish bets. The USD/CAD pair might then accelerate the momentum towards the next relevant hurdle near the 1.3870-1.3875 region en route to the 1.3900 mark, or the highest level since May 2020 touched on earlier this month.

On the flip side, the 1.3750-1.3745 area now seems to protect the immediate downside ahead of the 1.3700 round figure and the 50-day SMA, currently around the 1.3660 region. A convincing break below the latter will be seen as a fresh trigger for bearish traders and drag the USD/CAD pair back towards the monthly swing low, around the 1.3630-1.3625 region, en route to the 1.3600 round figure.