USD/CAD Price Forecast: Bulls remain on the sidelines as Middle East tensions boost Oil prices

The USD/CAD pair stages a goodish intraday recovery from sub-1.3600 levels, or its lowest level since October 2024 touched earlier this Friday, though it stalls the momentum near the 1.3650 area during the early European session. The US Dollar (USD) attracts safe-haven flows amid a fresh wave of the global risk-aversion trade and reverses a part of Thursday's slump to over a three-year low. This turns out to be a key factor acting as a tailwind for spot prices. However, expectations for a less dovish Bank of Canada (BoC) and surging Crude Oil prices underpin the commodity-linked Loonie, which, in turn, caps the currency pair.

The global risk sentiment took a turn for the worse in reaction to a further escalation of geopolitical tensions in the Middle East. Israel launched pre-emptive airstrikes across Iran on Friday, targeting its nuclear and missile sites.  Israel's Prime Minister Benjamin Netanyahu called the action a necessary step to roll back the Iranian threat to the country's very survival and added that the operation will continue for as many days as it takes. Following the attack, Israeli Minister of Defense Israel Katz declared a special state of emergency in anticipation of a retaliatory missile and drone attack from Iran on its civilian population.

Meanwhile, US Secretary of State Marco Rubio said in a statement that Israel took unilateral action and that America was not involved in the strikes. However, a spokesperson for Iran's armed forces said that Israel carried out the attacks with support from the US. Iran's Defence Minister Aziz Nasirzadeh had threatened to strike US bases in the region if conflict erupts over its nuclear program. Adding to this, Iran’s Supreme Leader Ayatollah Ali Khamenei said that with this attack Israel has prepared a bitter fate for itself. This, in turn, raises the risk of a broader conflict in the Middle East region and weighs on investors' sentiment.

On the trade-related front, US President Donald Trump said on Wednesday that he would set unilateral tariff rates and inform trading partners within two weeks. Moreover, Trump's expanded steel tariffs, which are currently at 50%, to a range of household appliances including dishwashers, washing machines, refrigerators, and more. Moreover, US Commerce Secretary Howard Lutnick said that tariff levels on Chinese imports remain at 55% and would not change from this point onward. This adds a layer of uncertainty in the markets and further forces investors to take refuge in traditional safe-haven assets, including the USD.

The downside for the Canadian Dollar (CAD), however, remains limited on the back of diminishing odds for more interest rate cuts by the Bank of Canada (BoC), hopes for a US-Canada trade deal, and rising Crude Oil prices. In fact, the black liquid rallied more than 9% intraday and shot to the highest level in almost five months amid concerns that the Israel-Iran conflict could disrupt supply from the Middle East. This holds back traders from placing aggressive bearish bets around the CAD and caps the USD/CAD pair. Traders now look to the Preliminary Michigan US Consumer Sentiment and Inflation Expectations Index for a fresh impetus.

USD/CAD 4-hour chart

Technical Outlook

From a technical perspective, the overnight breakdown and close below the 1.3675-1.3670 congestion zone was seen as a fresh 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 any further USD/CAD recovery could be seen as a selling opportunity and remain capped near the aforementioned support breakpoint. However, some follow-through buying, leading to a subsequent strength beyond the 1.3700 mark, could trigger a short-covering rally and lift spot prices beyond the 1.3735-1.3740 hurdle, toward the 1.3800 mark en route to the 1.3825-1.3830 supply zone.

On the flip side, the 1.3600-1.3590 region could offer some immediate support, below which the USD/CAD pair could accelerate the fall to the 1.3545 intermediate support before eventually dropping to the 1.3500 psychological mark. A convincing break below the latter would set the stage for an extension of over a four-month-old downtrend and drag spot prices to the 1.3440 area en route to the September 2024 swing low, just ahead of the 1.3400 round figure.