USD/CAD WEEKLY OUTLOOK: BULLISH
- USD/CAD has soared since late October, printing higher lows and higher highs on its journey north
- Earlier this week, the price pulled back modestly, but has since rebounded after failing to break cluster support near the 1.2600 area
- The near-term technical and fundamental bias for USD/CAD is positive
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USD/CAD has soared since late October amid weak oil prices and broad-based U.S. dollar strength, triggered by rising yields on expectations that the FOMC will accelerate the pace of monetary policy normalization to counter rising inflationary forces in the economy.
During the time in question, this popular forex pair has climbed over 430 pips from a low of 1.2288 to a high of 1.2855, before settling around the 1.2720 area. This big rise has allowed USD/CAD to print higher lows and higher highs sequentially and to overtake its 50-day, 100-day, and 200-day simple moving average decisively, constructive signals for price action.
Earlier this week, we witnessed a modest pullback, but price has since recovered after failing to breach cluster support in the 1.2600 area, where the 100-day SMA converges with the 38.2% Fibonacci retracement of the June/August rally. With bulls steering the wheel, there may be few obstacles to an upside move in the coming days, but to rejuvenate buying momentum in a convincing manner, we would need to see a sustained climb above resistance at 1.2770. Should this situation play out, USD/CAD could be on track to retest the December high at 1.2855 before aiming for the 1.2900 psychological level.
On the flip says, if bears reassert themselves and manage to push the exchange rate lower, the first support to watch out for appears at 1.2600/1.2590. Althoughany downside pressure should moderate around these levels, the sell-off could accelerate in the event of a breakdown. If this scenario materializes, sellers could target the 1.2540 area before preparing to attack the 200-day SMA and the 50% retracement near 1.2480.
From a fundamental standpoint, the stars appear to be aligning for further US dollar strength in the near term. With U.S. headline inflation at a 39-year high of 6.8% y/y in November, and policymakers increasingly uncomfortable with the current trend in consumer prices, the Federal Reserve may announce next week a plan to end bond purchases sooner than initially planned. Faster QE tapering could pave the way for earlier and multiple rate hikes in 2022, a bullish outcome for the greenback. The FOMC is set to release its monetary policy decision on Wednesday, so traders should prepare for a week of higher-than-usual volatility across asset classes.
USD/CAD TECHNICAL CHART
USD/CAD chart prepared using TradingView
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— Written by Diego Colman, Contributor