USD/CAD Price Forecast: Limited upside potential amid easing trade war jitters

The USD/CAD pair rebounds from the vicinity of the year-to-date (YTD) low and now seems to have stalled a sharp retracement slide from the 1.4800 neighborhood, or the highest level since April 2003 touched on Monday. Spot prices climb back above the mid-1.4300s during the first half of the European session and draw support from a combination of factors. 

Crude Oil prices languish near a three-month low amid worries about the potential negative implication on fuel demand in the wake of a fresh US-China trade war. China announced tariffs on some US goods in retaliation to US President Donald Trump's new 10% levy on Chinese imports, which came into effect on Tuesday. Furthermore, a large build in US stockpiles pointed to a weak demand in the world's largest Oil consumer and should act as a headwind for the black liquid. Apart from this, the Bank of Canada's (BoC) decision to cut interest rates for the sixth time in a row since June and dovish outlook undermine the commodity-linked Loonie. This, along with the emergence of some US Dollar (USD) buying, offers some support to the USD/CAD pair. 

The USD uptick, however, lacks bullish conviction amid expectations that the Federal Reserve (Fed) would stick to its easing bias. The bets were reaffirmed by Wednesday's disappointing release of the US ISM Services PMI, which, to a larger extent, offset the better-than-expected private sector employment details. The Institute of Supply Management (ISM) reported that its gauge measuring business activity in the US services sector declined from 54.0 to 52.8 in January. Adding to this, the Prices Paid Index dropped to 60.4 from 64.4, while the Employment Index edged higher to 52.3 from 51.3. Meanwhile, Automatic Data Processing (ADP) reported that private-sector employers added 183K in January compared to 176K in the previous month.

The economic data dragged the US Treasury yields to their lowest level since mid-December, which might keep a lid on any meaningful USD recovery to its lowest level in over a week. Apart from this, US President Donald Trump's decision to delay 25% trade tariffs against Canada and Mexico could offer some support to the Canadian Dollar (CAD) and hold back traders from placing aggressive bullish bets around the USD/CAD pair. Investors now look forward to the release of the US Weekly Initial Jobless Claims data for some impetus. The focus, however, remains on the monthly employment details from the US and Canada on Friday. Nevertheless, the aforementioned fundamental backdrop warrants some caution before positioning for further gains.

USD/CAD daily chart

Technical Outlook

Technical indicators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for the USD/CAD pair is to the downside. That said, some follow-through selling below the 1.4270-1.4260 area, or the YTD low, is needed to reaffirm the negative bias. Spot prices might then accelerate the fall toward the 1.4200 round figure. The downward trajectory could extend further towards the 1.4170 intermediate support en route to the 1.4125 region and the 1.4100 mark.

On the flip side, any further move up is likely to face stiff resistance ahead of the 1.4400 mark. The said handle might now act as a pivotal point for intraday traders, which if cleared should lift the USD/CAD pair to the 1.4450 horizontal barrier en route to the 1.4500 psychological mark. Some follow-through buying beyond the 1.4535 hurdle will shift the bias back in favor of bulls. Spot prices might then aim to reclaim the 1.4600 round figure and climb further towards the 1.4665-1.4670 region.