USD/CAD Analysis: Setup favours bullish traders ahead of Canadian CPI, US PMIs


  • USD/CAD regains positive traction and draws support from a combination of factors.
  • Sliding oil prices undermines the Loonie and acts as a tailwind amid a stronger USD.
  • Hawkish Fed expectations and recession fears seem to benefit the safe-haven buck.
  • Traders look to the Canadian CPI report and the flash US PMIs for a fresh impetus.

The USD/CAD pair attracts fresh buying during the Asian session on Tuesday and reverses a major part of the previous day’s slide. Crude oil prices come under some renewed selling pressure amid worries that rapidly rising borrowing costs will dampen economic growth and dent fuel demand. This, in turn, weighs on the commodity-linked Loonie, which, along with sustained US Dollar buying, acts as a tailwind for the major.

In fact, the USD Index, which tracks the Greenback against a basket of currencies, remains well within the striking distance of a six-week high touched last Friday amid hawkish Fed expectations. The markets seem convinced that the US central bank will stick to its hawkish stance and have been pricing in at least a 25 bps lift-off at each of the next two FOMC policy meetings in March and May. The bets were lifted by the US CPI and PPI data released last week, which showed that inflation isn’t coming down quite as fast as hoped.

Furthermore, a slew of FOMC members, including Fed Chair Jerome Powell, recently stressed the need to keep lifting rates gradually to fully gain control of inflation. Adding to this, the upbeat US macro data pointed to a resilient economy despite rising borrowing costs and support prospects for further policy tightening by the Fed. This, in turn, triggers a fresh leg up in the US Treasury bond yields and lends support to the buck. Adding to this, a softer risk tone further seems to benefit the Greenback’s relative safe-haven status.

It will now be interesting to see if the USD/CAD bulls can capitalize on the positive move or opt to lighten their bets ahead of the Canadian consumer inflation figures, due later during the early North American session. Trades will further take cues from the flash US PMI prints, which, along with the US bond yields and the broader risk sentiment, will drive the USD demand. Apart from this, oil price dynamics should provide some impetus to the major. The focus, however, will remain glued to the FOMC meeting minutes, scheduled for release on Wednesday.

Technical Outlook

From a technical perspective, the emergence of fresh buying on Tuesday adds credence to last week’s bullish breakout through over a two-month-old descending channel. Moreover, oscillators on the daily chart have just started moving in positive territory and support prospects for additional gains. Hence, a subsequent move back towards challenging the 100-day SMA, currently pegged just above the 1.3500 psychological mark, looks like a distinct possibility.

Some follow-through buying beyond last Friday’s swing high, around the 1.3535-1.3540 region, will be seen as a fresh trigger for bulls and set the stage for a further appreciating move. The USD/CAD pair might then surpass an intermediate resistance near the 1.3570 area and aim to reclaim the 1.3600 round figure. The upward trajectory could get extended further towards retesting the YTD peak, around the 1.3680-1.3685 region touched in January.

On the flip side, the 1.3440 horizontal zone now seems to have emerged as immediate support. Any further pullback could be seen as a buying opportunity around the 1.3400 mark and remain limited. That said, a convincing break below the latter might prompt some technical selling and drag the USD/CAD pair towards the 1.3330 intermediate support. Spot prices could eventually drop to the 1.3300 mark en route to the last week’s swing low, around the 1.3275-1.3270 region.