USD/CAD Price Forecast: Bears now await break below 50% Fibo. support near 1.4030

USD/CAD bulls remain on the sidelines as bullish oil prices continue to underpin the Loonie.
Geopolitical risks and Fed hike bets offer some support to the USD, limiting further losses.
Weakness below the 50% Fibo. is needed to reaffirm a short-term bearish technical setup.

Haresh Menghani FXStreet

The USD/CAD pair struggles to capitalize on the previous day's modest bounce from the 1.4030 area, or a nearly one-month low, as rising oil prices underpin the commodity-linked Loonie and cap the upside. Bears, however, seem hesitant, with spot prices holding steady around the 1.4050 area during the early European session on Wednesday amid a modest US Dollar (USD) uptick.

Investors seem convinced and are pricing in around a 90% chance that the US Federal Reserve (Fed) will raise borrowing costs again in December amid inflation fears stemming from volatile crude oil prices. Moreover, the uncertainty surrounding US-Iran peace talks keeps the geopolitical risk premium in play, assisting the safe-haven USD to recover slightly from a three-week low and acting as a tailwind for the USD/CAD pair. Traders might also refrain from placing aggressive directional bets ahead of next week's key central bank events – the Bank of Canada (BoC) rate decision and the outcome of a two-day FOMC meeting on Wednesday.

From a technical perspective, the overnight break below the 200-period Simple Moving Average (SMA) on the 4-hour chart was seen as a fresh trigger for bearish traders. Furthermore, the Relative Strength Index (RSI) is lingering near 31, and Moving Average Convergence Divergence (MACD) is hovering slightly below the zero line, which together suggest that rallies are likely to be capped while sellers retain control. However, a break below 1.4030, representing the 50% Fibonacci retracement level of the September-October rally, is needed to reaffirm the negative bias and back the case for a further depreciating move for the USD/CAD pair.

The next relevant support is located at the 61.8% retracement at 1.3968, with deeper levels seen at 1.3876, then the 1.3760 zone, which, if broken, would expose the broader corrective floor of the current Fibonacci cycle. On the topside, initial resistance appears at the clustered 200-period SMA and 38.2% retracement between 1.4079 and 1.4096, followed by the 23.6% level at 1.4175 and the recent swing high around 1.4303.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

USD/CAD 4-hour chart

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Author

Haresh Menghani

FXStreet

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

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