**Canadian Dollar Outlook: USD/CAD Pulls Back After Testing 1.3800 Resistance**
*Original analysis by Matt Weller, FOREX.com. Adapted and expanded for in-depth coverage.*
The Canadian dollar (CAD) has recently shown signs of strength against the U.S. dollar (USD), as USD/CAD retreated after testing the 1.3800 level. This reversal comes after weeks of gains for the U.S. dollar, driven primarily by strong U.S. economic data and hawkish commentary from Federal Reserve officials. However, renewed investor interest in the Canadian dollar highlights a potential inflection point in the USD/CAD pair.
This report delves into the technical and fundamental backdrop of USD/CAD, examining what’s driving the recent reversal and what to watch in the weeks ahead.
## Recent USD/CAD Performance Overview
The USD/CAD currency pair had been trending higher in recent weeks, fueled by:
– Better-than-expected U.S. economic indicators
– Sticky inflation figures leading to delayed rate cut expectations from the Federal Reserve
– Political and economic uncertainty weighing on risk-sensitive assets like the Canadian dollar
However, the 1.3800 level has historically been a strong zone of resistance for USD/CAD. After briefly touching that area in late May, the currency pair has sharply reversed as the Canadian dollar finds renewed support.
## Technical Analysis of USD/CAD
According to Matt Weller at Forex.com, price action around the 1.3800 mark has been pivotal in signaling a potential short-term top for USD/CAD. Here’s an in-depth look at the current technical setup:
**Key Resistance:**
– 1.3800 has acted as a major resistance level on multiple occasions since October 2022.
– That level briefly held in March 2023, with only one exception in the last 18 months when a daily close occurred above it.
– The inability of bulls to decisively break above this level may discourage further buying unless a strong catalyst emerges.
**Price Rejection:**
– Recent candlestick formations show long upper wicks near 1.3800, indicating rejection of higher prices and buyer exhaustion.
– The reversal from these highs suggests selling pressure or profit-taking has begun to dominate.
**Support Levels to Watch:**
– Immediate support lies at the 1.3650 level.
– A more significant support level can be found near 1.3550, corresponding to the 50-day moving average.
– If momentum continues lower, 1.3450 will offer further support and may mark a shift in the broader trend.
**Technical Indicators:**
– Relative Strength Index (RSI) has turned lower from overbought levels, supporting the case for a deeper pullback.
– Momentum indicators like MACD have started to converge, hinting at potential bearish crossover in the near term.
## Fundamental Drivers Behind USD/CAD’s Moves
Aside from technical cues, several macroeconomic and geopolitical factors are influencing the CAD/USD exchange rate.
### U.S. Economic Outlook
Strong U.S. economic data has been a key tailwind for the dollar since early 2024. Highlights include:
– Q1 GDP growth of 1.6% YoY
– Persistently elevated inflation, with the April CPI at 3.4%
– Low unemployment rate near 3.9%
– Better-than-expected retail sales and job creation
However, some recent data points have shown signs of softening, allowing the Canadian dollar to catch a bid. Notably:
– Jobless claims have been showing a slight upward trend
– The ISM manufacturing index returned to contraction territory
– Consumer sentiment has declined based on University of Michigan surveys
All these may strengthen the argument that the Federal Reserve might begin easing rates in late 2024, thereby reducing USD momentum.
### Federal Reserve Policy Outlook
As of June 2024, the market remains uncertain about the timing of the Fed’s first interest rate cut
Read more on USD/CAD trading.