USD/CAD Price Forecast: Could test 200-day SMA near 1.4000; US PCE Price Index in focus

The USD/CAD pair prolongs its uptrend for the fifth consecutive day – also marking the seventh day of a positive move in the previous eight – and trades near its highest level since May 20, around mid-1.3900s during the early European session on Friday. The Canadian Dollar (CAD) continues with its relative underperformance in the wake of expectations for additional interest rate cuts by the Bank of Canada (BoC). In fact, BoC Governor Tiff Macklem said on Tuesday that the central bank will support economic growth while ensuring inflation remains well controlled. This offsets a recovery in Crude Oil prices witnessed since the beginning of this week and continues to undermine the Loonie.

Meanwhile, dovish BoC outlook marks a significant divergence in comparison to Federal Reserve (Fed) Chair Jerome Powell's cautious remarks. Powell told reporters last week that the move to lower rates was a risk management cut and that he doesn't feel the need to move quickly on rates as risks to inflation remain tilted to the upside. Powell further stated earlier this week that easing too aggressively could leave the inflation job unfinished and need to reverse course. Moreover, the upbeat US macro data released on Thursday fueled uncertainty over the pace of rate cuts by the Fed, which lifted the US Dollar (USD) to a three-week high and offered additional support to the USD/CAD pair.

The third estimate of the US Gross Domestic Product (GDP) published by the US Bureau of Economic Analysis showed that the economy expanded at an annualized pace of 3.8% in the second quarter. The revision was higher than the growth of 3.3% reported previously and also highlighted a strong rebound from a 0.5% contraction recorded in the first quarter. Furthermore, the US Census Bureau reported that Durable Goods Orders rose by 2.9% month-over-month in August, reversing a revised 2.7% slump in July and better than market expectations of a 0.5% fall. Adding to this, US Initial Jobless Claims fell to 218K for the week ending September 20 from the previous week’s revised 232K.

The strong data points to economic resilience despite headwinds stemming from US President Donald Trump's trade tariffs and temper hopes for a more aggressive policy easing by the Fed. Nevertheless, traders are still pricing in a greater chance that the US central bank will lower borrowing costs again in October and December. This, in turn, prompts some USD profit-taking ahead of the release of the US Personal Consumption Expenditure (PCE) Price Index later during the North American session. Apart from this, the monthly Canadian GDP print for July, which is expected to show that the economy grew by 0.1%, might provide some impetus to the USD/CAD pair heading into the weekend.

USD/CAD daily chart

Technical Outlook

From a technical perspective, the recent repeated rebounds from 1.3725-1.3720 horizontal support and the overnight breakout through the 1.3900 mark could be seen as a fresh trigger for the USD/CAD bulls. Given that oscillators on the daily chart are holding comfortably in positive territory and are still away from the overbought zone, spot prices could extend the momentum further towards the 1.4000 psychological mark. The latter represents the very important 200-day Simple Moving Average (SMA), which, if cleared, decisively will set the stage for an extension of the uptrend witnessed over the past two weeks or so.

On the flip side, any corrective pullback could be seen as a buying opportunity and remain limited near the 1.3900 mark. Some follow-through selling below the overnight swing low, around the 1.3885 region, could expose the next relevant support near the 1.3845 horizontal support before the USD/CAD pair eventually drops to the 1.3800 round figure. A convincing break below the latter would negate the positive outlook and drag spot prices below the 1.3770 area, towards the 1.3725-1.3720 pivotal support.