Title: USD/CAD Technical Analysis: Momentum Builds for Second Consecutive Day Amid Hawkish Fed and Oil Weakness
Source Credit: Original article by Adam Button, ForexLive via TradingView
Overview
The USD/CAD currency pair has gained strength for the second consecutive trading session, bolstered by a hawkish Federal Reserve tone and a backdrop of declining oil prices. Traders and analysts have noted that recent movements suggest a breakout to the upside, as the pair pushes through key resistance levels and eyes further gains. This technical surge comes at a critical time for the pair, with macroeconomic headwinds and supportive dollar sentiment simultaneously influencing the market.
This article delves into the factors driving the recent bullish momentum in USD/CAD, examines key technical levels, and discusses potential scenarios based on market indicators, central bank policies, and commodity correlations. By blending technical and fundamental analysis, traders can better understand the dynamics at play in this pivotal pair.
1. Key Drivers Behind the USD/CAD Upside Movement
Several critical elements have contributed to the upward movement in USD/CAD:
Hawkish Fed Stance:
– The U.S. Federal Reserve signaled a more hawkish monetary policy path, reinforcing expectations that interest rates will stay elevated for an extended period.
– Fed Chair Jerome Powell and several FOMC members have indicated a strong commitment to curbing inflation, even at the cost of slower growth.
– Higher U.S. interest rates result in a stronger U.S. dollar, as they attract more capital into dollar-denominated assets.
Weakening Crude Oil Prices:
– Oil prices have dipped over recent sessions, with WTI crude falling below the psychological $80 per barrel level at times.
– As Canada is a major oil exporter, its currency (CAD) tends to be positively correlated with oil prices.
– A drop in oil demand due to slowing global economic activity and rising stockpiles in the U.S. have pressured crude prices lately.
– Consequently, the Canadian dollar has weakened alongside energy prices.
Market Positioning and Risk-Off Sentiment:
– A risk-off sentiment continues to drive capital into the safe-haven U.S. dollar, especially amid concerns about global economic slowdown and geopolitical instability.
– Global equity markets remain cautious, reflecting broader economic uncertainties and interest rate risks.
2. Technical Analysis: USD/CAD Moves Higher
From a technical perspective, the USD/CAD pair has shown impressive momentum to the upside. A combination of favorable price action and market catalysts suggest that more gains may be likely in the near term.
Support and Resistance Levels:
– Initial support: 1.3623 – This level was previously resistance, but now flips to support after being broken.
– Immediate resistance: 1.3744 – This near-term level will be closely watched by traders as the next barrier to further rallying.
– Year-to-date high: 1.3850 – This is a critical resistance point; if breached, it could signify a strong upward breakout.
– Psychological resistance: 1.3900 – This round-number level may offer psychological resistance, even if the technicals are in alignment for further upside.
Technical Indicators:
– Moving Averages: The pair trades above the 50-day and 200-day moving averages, suggesting bullish momentum is in place.
– Relative Strength Index (RSI): RSI is approaching overbought territory, currently near 68–70. This suggests buying momentum is strong but may encounter a cooldown or temporary consolidation.
– MACD (Moving Average Convergence Divergence): The MACD is above the signal line and shows a widening divergence, supporting the current bullish trend.
Breakout Confirmation:
– The recent break above 1.3623 has been confirmed by a strong daily candle close, indicating that bulls remain firmly in control.
– Volume profile analysis indicates increased trader participation at higher levels, lending strength to the upward move.
3. Fundamental Backdrop: U.S. and Canadian Economic Divergence
Federal Reserve Policy Outlook:
– Fed
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