USD/CAD Price Forecast: 200-day SMA/1.4000 breakout in play ahead of Canadian jobs data

The USD/CAD pair touches a fresh six-month top during the first half of the European session on Friday and seems poised to build on the previous day's breakout momentum beyond a technically significant 200-day Simple Moving Average (SMA). Crude Oil prices hang near the weekly low and undermine the commodity-linked Loonie, which acts as a tailwind for the currency pair. However, a modest US Dollar (USD) downtick caps gains for spot prices.

US President Donald Trump announced on Wednesday that Israel and Hamas had agreed on the first phase of his 20-point Gaza peace plan after talks in Egypt, easing market concerns about the risk of oil supply disruptions from the Middle East. This comes on top of worries that a prolonged US government shutdown could dampen the economy and hurt fuel demand in the world’s largest Oil consumer, and exert pressure on the black liquid.

The US government shutdown is now in its second week amid few signs of progress toward a deal. The Senate rejected motions to advance competing bills for the seventh time on Thursday and will not hold any further votes until at least next week, when the upper chamber returns on Tuesday. This, along with dovish Federal Reserve (Fed) expectations, prompts USD profit-taking following this week's sharp rally to the highest level since early August.

The CME Group's FedWatch Tool indicated that the possibility of a 25-basis-point (bps) interest rate cut by the Fed in October and December stands at around 99% and 82%, respectively. However, political chaos in France and Japan, which has been weighing on the Euro (EUR) and the Japanese Yen (JPY) recently, limits deeper USD losses. Moreover, a cautious market mood contributes to the safe-haven USD's outperformance against its Canadian counterpart.

This, in turn, backs the case for a further appreciating move for the USD/CAD pair, which remains on track to end in the green for the third straight week. Traders, however, seem reluctant to place fresh bullish bets and opt to wait for the release of the monthly Canadian employment details. From the US, the University of Michigan Consumer Sentiment Index, along with Fedspeak, might influence the USD and provide short-term impetus to the currency pair.

USD/CAD daily chart

Technical outlook

Thursday's breakout through the 200-day SMA and the 1.4000 psychological mark was seen as a key trigger for the USD/CAD bulls. However, the lack of follow-through buying beyond the 38.2% Fibonacci retracement level of the February-June decline warrants some caution. Moreover, the daily Relative Strength Index (RSI) is hovering close to the overbought territory, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.

In the meantime, any corrective slide might now be seen as a buying opportunity near the 1.3980-1.3975 region (200-day SMA). This should help limit the downside near the 1.3940-1.3935 horizontal support. Some follow-through selling, however, could drag the USD/CAD pair below the 1.3900 mark, towards the next relevant support near the 1.3865-1.3860 zone. This is closely followed by the 23.6% Fibo. retracement level, around the 1.3840 region, which, if broken, might shift the bias in favor of bears.

On the flip side, bulls might now wait for a move beyond the 1.4030-1.4035 region, or a multi-month peak, before placing fresh bets. The USD/CAD pair might then accelerate the momentum and aim towards reclaiming the 1.4100 round figure before climbing further towards the 50% Fibo. retracement level, around the 1.4160-1.4165 area. A sustained strength beyond the latter should pave the way for a further near-term appreciating move.