USD/CAD Price Forecast: Consolidates below 1.3900 as bears await 200-SMA breakdown
- USD/CAD lacks a firm intraday directional bias on Tuesday amid a combination of diverging forces.
- Rising oil prices underpin the Loonie, while hawkish Fed bets provide a goodish lift to the USD.
- The technical setup favors bearish traders and backs the case for a further near-term depreciation.
The USD/CAD pair struggles to capitalize on the overnight bounce from its lowest level since June 3, around the 1.3845 zone, also representing the 200-day Simple Moving Average (SMA) support, and oscillates in a narrow band on Tuesday. Spot prices extend the range-bound price action through the early European session and currently trade around the 1.3870-1.3875 region, unchanged for the day amid mixed cues.
Crude oil prices climb to an over two-week high amid the US-Iran standoff over the Strait of Hormuz. This, along with Monday's hot Canadian consumer inflation figures, continues to underpin the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair. The downside, however, remains cushioned amid a strong follow-through US Dollar (USD) recovery from a two-month low, bolstered by bets for at least one rate hike by the US Federal Reserve (Fed) on the back of oil-driven inflation risks.
Meanwhile, momentum indicators suggest that bearish sentiment dominates even as spot prices stabilize above the longer-term trend support. In fact, the Relative Strength Index (14) sits in oversold territory near 29, hinting at stretched downside conditions, while the Moving Average Convergence Divergence (MACD) indicator remains below zero with negative readings. Moreover, the USD/CAD pair has found acceptance below the 50% Fibonacci retracement level of the April-June rally, validating the negative outlook.
However, a convincing break below the 200-day SMA at 1.3848 is needed to back the case for deeper losses to the 61.8% Fibo. level at 1.3822. Some follow-through selling would expose the 78.6% level at 1.3708, before the USD/CAD pair extends the fall toward the structural floor near 1.3562.
On the topside, initial resistance is located at the 50.0% retracement at 1.3902, followed by the 38.2% level at 1.3982 and then the 23.6% retracement at 1.4081, with the cycle high anchor around 1.4242 acting as a more distant barrier.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
USD/CAD daily chart
Canadian Dollar FAQs
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.
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.
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.
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.
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.
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