USD/CAD Outlook: Move beyond mid-1.3600s to set the stage for further gains

The USD/CAD pair gains strong follow-through traction for the second straight day and moves well within the striking distance of the monthly high during the Asian session on Wednesday. Against the backdrop of expectations that the Federal Reserve (Fed) will keep interest rates higher for longer, the risk-off impulse boosts the safe-haven US Dollar (USD) and acts as a tailwind for the major. In fact, markets are pricing in a greater chance of another 25 bps lift-off at the next FOMC policy meeting in June as bets were lifted by the US PCE Price Index data on Friday, which showed that inflation remains sticky. Market sentiment, meanwhile, remains fragile amid worries about slowing global economic growth, particularly in China.

The National Bureau of Statistics (NBS) reported that China's factory activity shrank faster than expected in May, with the official Manufacturing PMI falling to a five-month low of 48.8. Furthermore, service sector activity expanded at the slowest pace in four months, according to the the official non-manufacturing PMI – which fell to 54.5 in May from 56.4 previous – adding to the pessimism over slowing fuel demand from top Oil importer China. This, in turn, drags Crude Oil prices to a nearly four-week low, which undermines the commodity-linked Loonie and provides an additional boost to the USD/CAD pair. Market participants look forward to important macro releases from Canada and the US for a fresh impetus later during the early North American session.

Wednesday's economic docket features the release of the Canadian Q1 GDP report, along with the Chicago PMI and JOLTS Job Openings data from the US. Apart from this, speeches by influential FOMC members and the broader risk sentiment will drive USD demand. Traders will further take cues from Oil price dynamics to grab short-term opportunities around the USD/CAD pair. Nevertheless, the fundamental backdrop seems tilted firmly in favour of bullish traders and supports prospects for a further near-term appreciating move. Hence, any meaningful pullback might continue to attract some dip-buying at lower levels and is more likely to remain limited ahead of the crucial US monthly employment details - the Nonfarm Payrolls report on Friday.

Technical Outlook

From a technical perspective, some follow-through buying beyond the 1.3650-1.3655 region, or the monthly peak, will be seen as a fresh trigger for bulls and reaffirm the constructive setup. The USD/CAD pair might then accelerate the momentum towards reclaiming the 1.3700 mark before climbing to the 1.3730-1.3735 resistance zone. The upward trajectory could get extended further towards the 1.3800 round figure.

On the flip side, the 1.3600 mark now seems to protect the immediate downside ahead of the overnight swing low, around the 1.3565 region. The next relevant support is pegged near the 100-day Simple Moving Average (SMA), currently near the 1.3515 zone, ahead of the 1.3500 psychological mark. A convincing break below the latter might negate the positive outlook and shift the near-term bias in favour of bearish traders, paving the way for a slide towards the 1.3450 area en route to the 1.3400 round-figure mark.