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USD/CAD Price Forecast: Bulls retain control near three-month peak; just below 1.3900

  • USD/CAD trades with a positive bias for the third straight day amid a firmer USD.
  • Rising Oil prices offer some support to the Loonie and cap the upside for the pair.
  • Traders also seem reluctant ahead of Fed Chair Jerome Powell’s speech on Friday.

The USD/CAD pair touches its highest level since May 22 during the early part of the European session on Thursday, with bulls now awaiting a move beyond the 1.3900 mark before placing fresh bets. The US Dollar (USD) regains positive traction following the previous day's two-way directionless price move and advances to a one-and-a-half-week top amid diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). This, in turn, is seen as a key factor lending support to the currency pair, though the intraday uptick lacks bullish conviction.

In fact, Minutes of the July 30-31 FOMC policy meeting released on Wednesday showed that almost all officials supported keeping rates unchanged, and a majority of participants judged the upside risk to inflation. Furthermore, policymakers noted rising threats to the economy that would warrant monitoring, though they largely agreed that their current stance was the appropriate way to go. This comes amid signs of a gain of momentum in price pressures and further tempers bets for a jumbo 50 basis points (bps) interest rate cut by the Fed in September.

Meanwhile, Crude Oil prices scale higher for the second consecutive day amid signs of strong demand in the US. In fact, the Energy Information Administration (EIA) reported on Wednesday that US crude inventories fell more than expected, by 6 million barrels last week. Moreover, a larger fall in Gasoline stocks indicated steady demand during the US summer travel season. This, along with the uncertainty over a Russia-Ukraine peace deal, supports the black liquid, which underpins the commodity-linked Loonie and keeps a lid on the USD/CAD pair.

Moreover, the USD bulls seem reluctant and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus remains glued to Fed Chair Jerome Powell's speech at the Jackson Hole Symposium, which, in turn, will drive the USD demand. In the meantime, concerns about the central bank's independence cap the buck and the USD/CAD pair. US President Trump demanded the resignation of Fed Governor Lisa Cook over mortgage fraud allegations, and has repeatedly attacked Fed Chair Jerome Powell for not cutting interest rates and even threatened to fire him.

Adding to this, the growing acceptance that the US central bank will resume its rate-cutting cycle next month and deliver at least two 25-bps rate cuts by the end of this year acts as a headwind for the Greenback. The Fed's policy stance, however, still marks a significant divergence in comparison to the Bank of Canada's (BoC) dovish tilt. In fact, the BoC left the door open for further interest rate cuts in the coming months. This, along with trade-related uncertainties, could weigh on the Canadian Dollar (CAD) and backs the case for a further move higher for the USD/CAD pair.

USD/CAD daily chart

Technical Outlook

This week's breakout through the 100-day Simple Moving Average (SMA) and the 1.3800 mark favors the USD/CAD bulls. Moreover, oscillators on the daily chart are holding in positive territory and suggest that the path of least resistance for spot prices remains to the upside. Some follow-through buying beyond the 1.3900 mark will reaffirm the constructive outlook and lift the pair towards the 1.3950 intermediate hurdle en route to the 1.4000 psychological mark. This is followed by May swing high, around the 1.4015 region, which, if cleared, would set the stage for additional gains.

On the flip side, the overnight swing low, around the 1.3855-1.3850 region, now seems to protect the immediate downside. Any further pullback might now be seen as a buying opportunity and is more likely to remain limited near the 1.3800 mark. This is followed by the 100-day SMA, around the 1.3790 region, which, if broken decisively, might prompt some technical selling and drag the USD/CAD pair to the 1.3755-1.3750 horizontal zone. This is followed by the 1.3720 region and the 1.3700 mark. Failure to defend the said support levels would shift the back in favor of bearish traders.

Author

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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