Title: USD/CAD Begins to Retrace from Overbought Territory: Analysis and Outlook
Source: Adapted from an article by Economies.com, July 29, 2025
Original Author: Economies.com Analysts
The USD/CAD currency pair has recently shown signs of pulling back after reaching overbought conditions. This retracement marks a potential shift in momentum after a strong bullish rally. Technical indicators and market fundamentals point to a possible correction or consolidation phase in the short term, though the broader trend may still be upward if certain support levels hold. In this in-depth analysis, we will explore the recent price action, technical signals, economic catalysts, and fundamental factors influencing the US dollar (USD) and Canadian dollar (CAD).
Overview of Recent USD/CAD Movement
Over the last several weeks, USD/CAD has been in a strong uptrend, with the pair reaching a peak near 1.3480. This upside momentum was largely driven by a combination of US dollar strength and weakness in the Canadian dollar, resulting from interest rate differentials, lower crude oil prices, and risk sentiment shifts. However, with the price encountering a resistance ceiling and technical oscillators signaling overbought conditions, the momentum has started to wane, opening the door to a potential downward correction.
Key Recent Developments:
– USD/CAD peaked near major resistance at 1.3480.
– The Relative Strength Index (RSI) crossed into overbought territory (>70) before beginning to retreat.
– A bearish short-term candlestick formation has emerged on the 4-hour and daily charts.
– Crude oil prices have rebounded moderately, supporting the CAD’s outlook.
Technical Analysis
Price Action:
After a sustained period of upward movement, the pair has begun to exhibit signs of bearish divergence. The price was making new highs, but this was not confirmed by momentum indicators such as RSI or the MACD.
Indicators to Watch:
– RSI: Recently crossed below 70, signaling a potential cooling-off period for the bulls.
– MACD: Histogram is flattening out, and signal lines are closing in on a potential bearish crossover.
– Trendlines: Price has broken below a short-term ascending trendline support, adding weight to the downside scenario.
Support and Resistance Levels:
– Immediate support lies at 1.3400, a psychological and technical level.
– The next major support is seen near 1.3350, which aligns with the 50-day Exponential Moving Average (EMA).
– Resistance in the short term remains at 1.3480, the recent high, followed by 1.3550 if the uptrend resumes.
Candlestick Patterns:
A bearish engulfing pattern appeared on July 28, adding to the probability of decline. The pattern suggests that selling pressure may continue in upcoming sessions, possibly driving price action toward the near-term support levels.
Fundamental Analysis
USD Side: Favorable Macroeconomic Conditions
The US economy has largely outperformed expectations in recent quarters, especially in Q2 2025. A combination of resilient labor data, climbing consumer spending, and above-target inflation have elevated expectations for prolonged higher interest rates.
Key USD Bullish Fundamental Drivers:
– The Federal Reserve remains hawkish, with the benchmark interest rate around 5.50 percent.
– Inflation data remains sticky, particularly in the services sector.
– US Non-Farm Payrolls (NFPs) show consistent job creation, reducing concerns of a recession.
– Rate cuts are not projected until Q2 or Q3 of 2026 by Fed futures pricing.
However, markets now anticipate a brief pause in Fed hiking, which may impact USD positioning in the short term.
CAD Side: Pressured by Weak Oil and Moderate Growth
The Canadian dollar tends to be correlated with crude oil prices, as Canada is a major oil exporter. Recently, WTI crude prices have ranged between $75 and $80 per barrel, which is below break-even levels needed
Read more on USD/CAD trading.