**USD/CAD Forecast: Canadian Dollar Faces Pressure as Pair Tests Key Resistance**
*Original Author Credit: Rich Dvorak, Forex Factory*
The Canadian dollar experienced notable weakness this week as USD/CAD surged toward a critical resistance zone, propelled by strong U.S. dollar performance and investor doubts surrounding the Bank of Canada’s future monetary policy path. With the pair taking aim at levels not seen since late 2023, traders are turning their focus to several technical and fundamental factors that may determine the next move.
This article will explore:
– The current USD/CAD price dynamics
– Technical outlook and resistance levels
– Influence of economic indicators from the U.S. and Canada
– Expectations for the Bank of Canada vs. U.S. Federal Reserve
– Market sentiment and positioning
– Forecast scenarios for USD/CAD
## USD/CAD Price Overview
As of early May 2024, USD/CAD has broken above key psychological and technical price levels, testing the upper boundary of an important resistance range around 1.3760. Traders are weighing the implications of diverging central bank expectations, U.S. economic resilience, and Canadian economic softness to determine whether the rally can continue or if it’s due for a pause.
Key Observations:
– USD/CAD rose by more than 1% over the week, reaching 5-month highs
– U.S. economic data continued to surprise to the upside, pushing Treasury yields higher and supporting the dollar
– The Bank of Canada (BoC) signaled increased caution due to a slowing Canadian economy, particularly in employment and consumer spending
## USD/CAD Technical Analysis
From a technical perspective, the USD/CAD currency pair is showing signs of bullish momentum after closing above the 1.3700 psychological barrier, pushing beyond prior resistance.
Key Technical Levels:
– **Resistance Zone**: 1.3760 to 1.3800, with the latter marking a significant level last reached in November 2023
– **Support Levels**:
– 1.3700 (former resistance, now acting as initial support)
– 1.3610 (50-day moving average)
– 1.3550 (April low and former minor swing level)
If USD/CAD manages to break above 1.3800 with conviction, it could open the door toward further gains, potentially targeting 1.3860 and even 1.3900 in the short to medium term. On the flip side, rejection at resistance could see the pair retrace back to 1.3700 or even lower.
Momentum Indicators:
– The Relative Strength Index (RSI) remains below overbought territory (currently near 65), suggesting there may still be room before the pair becomes technically stretched
– Moving Averages (20-day and 50-day) are in bullish alignment, confirming upward momentum
## Macroeconomic Drivers Behind the Rally
### U.S. Strength Lifts the Dollar
The U.S. dollar gained across the board in early May due to robust economic data, renewed expectations for higher-for-longer interest rates, and American labor market strength. Among key data points were:
– Strong non-farm payrolls and private-sector job gains
– Better-than-expected GDP prints for Q1 and upward revisions to Q2 estimates
– Sticky inflation data keeping the Federal Reserve cautious about policy easing
Federal Reserve Chair Jerome Powell delivered a balanced message, indicating that while no rate hikes are on the table, inflation persistence prevents near-term policy easing. This stance buoyed the U.S. dollar, pushing it higher against the loonie.
### Canadian Economic Weakness
Conversely, the Canadian economy has recently shown signs of softening:
– Canadian GDP contracted slightly in Q1, after stalling in Q4 2023
– Job growth in March and April significantly missed expectations
– Retail sales and housing starts have slowed
– Wage growth has flattened, reducing inflationary risks for
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