**USD/CAD Outlook: Head-and-Shoulders Pattern Emerges Amid Conflicting Fundamentals**
*Original article by Craig Erlam via MarketPulse*
The USD/CAD currency pair currently finds itself at a pivotal juncture, with technical and fundamental dynamics feeding into an increasingly complex outlook. As highlighted by Craig Erlam of MarketPulse, a developing head-and-shoulders pattern signals potential bearish reversal pressure on the pair. At the same time, economic variables from both the U.S. and Canada are offering mixed signals, adding further layers of uncertainty to an already volatile currency relationship.
This article expands upon Erlam’s original insights, taking a more comprehensive look into the current state of USD/CAD, key technical formations, monetary policy expectations, and macroeconomic indicators that traders should consider. With numerous variables at play, the USD/CAD narrative remains far from straightforward, and the path forward will depend largely on upcoming economic releases and central bank decisions.
## Chart Analysis: Head-and-Shoulders Formation in Focus
At the core of the current USD/CAD technical outlook is a prominent head-and-shoulders pattern forming on the daily chart. Traditionally seen as a bearish reversal pattern, this configuration suggests a potential shift lower in USD/CAD, especially if it breaks below the “neckline” — a key support level that connects the troughs between the left shoulder, head, and right shoulder.
– **Left Shoulder**: Formed in late April as the pair attempted to rally but fell short of creating new highs.
– **Head**: A higher spike that occurred in early May, representing a temporary peak in bullish sentiment.
– **Right Shoulder**: Currently forming or already completed in late May to early June, with declining upside momentum.
– **Neckline Support**: The critical level to watch lies near the 1.36 mark. A decisive break below this level would confirm the pattern and could initiate a move lower toward the 1.34 or even 1.33 handle.
Notably, volume tends to decrease as the right shoulder forms, which is consistent with the typical behavior seen in this pattern. A confirming break would signal a shift in market sentiment and the potential start of a short-term bearish trend.
## Key Technical Levels to Watch
– **Immediate Resistance**: 1.3750 – A level that coincides with recent highs and the top of the right shoulder.
– **Neckline Support**: Approx. 1.3600 – A break below this zone would validate the bearish pattern.
– **Next Support Zones**:
– 1.3450 – Near the 100-day moving average.
– 1.3350 – Psychological support and the March low.
Additionally, the Relative Strength Index (RSI) and MACD indicators are showing signs of divergence and potential bearish momentum, suggesting the technical backdrop leans in favor of further downward pressure if neckline support gives way.
## Contradictory Fundamentals Weigh on the Outlook
While the chart may point downward, the fundamental story complicates matters. Traders must balance the technical reversal signals with macroeconomic indicators and central bank policies that are not perfectly aligned.
### United States Economic Outlook
The U.S. dollar continues to be supported by relatively strong economic data, which has kept Treasury yields elevated and delayed market expectations for Federal Reserve interest rate cuts.
– **Labor Market Resilience**: U.S. job growth remains strong, with May’s nonfarm payrolls beating expectations. Unemployment remains close to historic lows, underscoring the strength of the labor market.
– **Inflation Dynamics**: Core inflation remains sticky, giving the Federal Reserve room to maintain a higher-for-longer interest rate stance.
– **Fed Policy Path**: Federal Reserve officials, including Chair Jerome Powell, have emphasized the need for more confidence that inflation is sustainably headed toward 2% before initiating rate cuts.
– **Market Pricing**: Fed futures now see only one cut in 202
Read more on USD/CAD trading.