USD/CAD Price Forecast: Bullish setup holds, backing case for further gains

USD/CAD attracts some dip-buyers following a bearish gap opening to sub-1.3800 levels.
Falling Oil prices undermine the Loonie, countering a weak USD and supporting the pair.
The technical setup favors bulls and backs the case for further near-term appreciation.

Haresh Menghani FXStreet

The USD/CAD pair reverses an intraday dip to sub-1.3800 levels and fills a modest weekly bearish gap, hitting a fresh daily top during the first half of the European session on Monday. Spot prices currently trade around the 1.3815 region, close to the highest since April 13, touched on Friday, though bulls seem hesitant amid a combination of diverging forces.

Crude Oil prices plummet to over a two-week low amid renewed hopes for a US-Iran peace deal and reopening of the Strait of Hormuz, undermining the commodity-linked Loonie and supporting the USD/CAD pair. Meanwhile, the latest optimism exerts heavy downward pressure on the safe-haven US Dollar (USD) and might keep a lid on any meaningful upside, warranting some caution before positioning for an extension of a three-week-old uptrend.

From a technical perspective, the USD/CAD pair keeps a constructive bullish bias above the 200-day Exponential Moving Average (EMA) and the 61.8% Fibonacci retracement of the March-May decline. Adding to this, a positive, rising Moving Average Convergence Divergence (MACD) histogram hints that upside momentum is strengthening. However, the Relative Strength Index (RSI) is approaching mildly overbought territory, holding back bulls from placing aggressive bets.

Hence, any subsequent move up is likely to confront immediate resistance at the 78.6% Fibo. retracement at 1.3877, with the recent swing high near 1.3965 as a stronger cap if buyers extend the move. On the downside, initial support sits in the 1.3807-1.3784 area, where the 61.8% retracement and the 200-day EMA cluster, followed by the 50% retracement around 1.3758, while deeper pullbacks would expose the 38.2% level at 1.3709 and the 23.6% retracement at 1.3648.

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

USD/CAD daily 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.

(This story was corrected on May 25 at 09:30 GMT to say, in the second paragraph, that Oil prices fell to a two-week low, not high.)

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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