Title: Canadian Dollar Forecast: USD/CAD Pulls Back Below June High, Eyes on Economic Data and Oil Prices
By Matt Weller (Original article source: Forex.com)
The USD/CAD currency pair has recently reversed course just before reaching its June high near 1.3785, a level that previously served as a significant resistance point. After climbing on the back of resurgent U.S. dollar strength and weakening commodity trends, particularly in crude oil prices, the pair has retraced due to a shift in investor sentiment. In this forecast, we examine the technical and fundamental landscape surrounding the Canadian dollar (CAD), expectations for upcoming economic data, and what market participants should monitor for clues about future price action.
Key Takeaways:
– USD/CAD reversed after testing resistance at the June high near 1.3785.
– Support is emerging near the 200-day simple moving average (SMA).
– Upcoming economic reports from both Canada and the U.S. are expected to influence direction.
– Crude oil prices remain a crucial driver for CAD strength or weakness.
– Diverging monetary policy expectations between the Bank of Canada (BoC) and the U.S. Federal Reserve could influence the pair in the coming weeks.
Market Context: USD Strength and CAD Sensitivity
The U.S. dollar (USD) has remained strong through much of 2024, with market participants betting on prolonged higher interest rates to control inflation. The USD Index (DXY) has been supported by stronger-than-expected labor market data, persistent core inflation, and hawkish Federal Reserve communication.
On the other side, the Canadian dollar has shown signs of sensitivity not just to rate differentials, but also to international crude oil prices. As Canada is one of the largest oil exporters globally, its currency is frequently viewed as a “petro-currency.” Oil prices, therefore, have a direct impact on CAD valuation.
Recent Economic Developments:
1. U.S. Economic Trends:
– Retail sales data from May slightly missed expectations with a 0.1% gain vs. forecasted 0.3%.
– The Consumer Price Index (CPI) showed signs of potential disinflation, though core inflation remains sticky.
– Non-farm payrolls earlier this month surprised to the upside, indicating continued labor market tightness.
2. Canadian Economic Trends:
– Canadian GDP for April posted flat growth (0.0%), below expectations.
– May’s inflation figure showed a modest slowdown in price pressures, leading to greater expectations for additional Bank of Canada rate cuts in upcoming meetings.
– The housing market remains soft, with building permits and housing starts under pressure.
Technical Analysis Highlights: USD/CAD Facing Resistance
– After briefly testing the 1.3785 resistance level, which marked the high of June 2024, USD/CAD has pulled back.
– Momentum indicators such as the Relative Strength Index (RSI) suggest the pair was close to overbought territory at recent highs.
– The 1.3670-1.3700 range serves as immediate support, with the stronger 200-day SMA near 1.3580 offering a more robust floor.
– A break below 1.3580 could signal a deeper retracement toward 1.3400.
Key Resistance and Support Levels:
Resistance:
– 1.3785: June high and a major technical resistance barrier.
– 1.3850: Psychological resistance level last seen in Q1 2023.
Support:
– 1.3670: Short-term support from recent price action.
– 1.3580: 200-day SMA and last strong trend support.
– 1.3400: Multi-month support zone formed in early 2024.
Fundamental Drivers to Watch:
1. Crude Oil Price Volatility:
– West Texas Intermediate (WTI) oil prices have been volatile, recently hovering near $80 per barrel.
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