USD/CAD Price Forecast: Seems vulnerable below 1.3700 amid heavy USD selling

The USD/CAD pair continues losing ground for the third consecutive day and drops to the 1.3680 region, or a fresh year-to-date low during the early part of the European session on Monday. Crude Oil prices rallied in reaction to the OPEC+ decision over the weekend to increase output in July by the same amount as it did in each of the prior two months. Adding to this, low levels of US fuel inventories have stoked supply jitters heading into what’s considered the start of the US driving season and further act as a tailwind for the black liquid. This, in turn, is seen underpinning the commodity-linked Loonie, which, along with the emergence of fresh selling around the US Dollar (USD), exerts additional pressure on the currency pair.

Investors now seem convinced that the Federal Reserve (Fed) will lower borrowing costs further and the bets were reaffirmed by the crucial US inflation data released on Friday. The US Bureau of Economic Analysis reported that the Personal Consumption Expenditures (PCE) Price Index cooled to a 2.1% YoY rate in April – or the lowest since February 2021. Moreover, the core PCE Price Index, which excludes volatile food and energy prices, came in at 2.5%, down from the 2.7% increase registered in March. Traders were quick to price in the possibility of at least two 25 basis points (bps) interest rate cuts by the Fed in September and December. This, in turn, continues to weigh on the Greenback and the USD/CAD pair.

Meanwhile, Fed Governor Christopher Waller said on Monday that rate cuts remain possible later this year even with the Trump administration's tariffs likely to push up price pressures temporarily. The FXStreet Sentiment Index, albeit remaining in hawkish territory, retreats slightly following Waller's remarks and drags the USD back closer to the monthly low touched last week. In contrast, hotter-than-expected Canadian core inflation figures released earlier this month dashed hopes for a Bank of Canada (BoC) interest rate cut in June. This, in turn, might further contribute to the Canadian Dollar's (CAD) relative outperformance and suggests that the path of least resistance for the USD/CAD pair is to the downside.

Traders now look to this week's important macro releases scheduled at the beginning of this week, starting with the US ISM Manufacturing PMI later during the North American session this Monday. Apart from this, Fed Chair Jerome Powell's appearance will be scrutinized for cues about the policy outlook, which, in turn, will drive the USD demand. Apart from this, Oil price dynamics should provide short-term trading impetus to the USD/CAD pair. The market focus, however, will remain glued to the closely-watched monthly employment details from the US on Canada, due on Friday. Nevertheless, the aforementioned fundamental backdrop supports prospects for a further near-term depreciating move for the currency pair.

Technical Outlook

From a technical perspective, an intraday breakdown and acceptance below the 1.3700 round figure could be 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, validating the near-term bearish outlook for the USD/CAD pair. Hence, a subsequent slide towards the 1.3655-1.3650 area, en route to the 1.3620 region and the 1.3600 mark, looks like a distinct possibility. Some follow-through selling should pave the way for an extension of the recent sharp retracement slide from a multi-year peak touched in February.

On the flip side, any attempted recovery might now confront immediate resistance near the 1.3720 area ahead of the mid-1.3700s. A sustained strength beyond could trigger a short-covering rally and assist the USD/CAD pair to reclaim the 1.3800 round figure. The subsequent move up, however, might still be seen as a selling opportunity and remain capped near the 1.3835-1.3840 supply zone. The latter should act as a key pivotal point, which if cleared decisively should pave the way for a move towards the 1.3900 mark en route to a short-term trading range support breakpoint, around the 1.3930 region.