USD/CAD Analysis: Bulls face rejection near 1.3600, downside potential seems limited

• USD/CAD struggles to capitalize on its modest intraday gains to 1.3600, or a multi-week high.
• The risk-on impulse caps the upside for the buck and the major amid an uptick in Crude Oil prices.
• The divergent BoC-Fed policy expectations should help limit any meaningful slide for the major.

The USD/CAD pair builds on Friday's solid bounce from the vicinity of the very important 200-day Simple Moving Average (SMA), currently near the 1.3400 mark, and touches a three-week high on Monday. The intraday move up, however, falters near the 1.3600 round figure and drags spot prices to the lower end of its daily range during the early European session. The Canadian Dollar (CAD) is undermined by firming expectations that the Bank of Canada (BoC) is finished hiking interest rates, bolstered by the weaker domestic data. Statistics Canada reported that Canada's economic growth stalled in July as the manufacturing sector posted its biggest decline in more than two years. This comes on top of a 0.2% contraction in June and fueled speculations that the BoC will keep interest rates on hold despite sticky inflation.

In contrast, the Federal Reserve (Fed) struck a more hawkish tone in September and left the door open for at least one more rate hike by the end of this year. Even the US Personal Consumption Expenditures (PCE) data released on Friday, which suggested that the underlying inflation moderated in August, also did little to change the market view that the Fed will continue to tighten its monetary policy. The US Bureau of Economic Analysis reported that the PCE Price Index rose in line with estimates, to 3.5% over the past twelve months through August as compared to the the previous month's upwardly revised reading of 3.4%. The Core PCE Price Index – the Fed's preferred gauge of inflation – decelerated from the 4.3% YoY rate in July (revised higher from 4.2%) and fell below the 4.0% mark for the first time since June 2021.

Inflation, however, remains well above the Fed's 2% target. Moreover, the rise in consumer spending and surging gasoline prices point to higher prices going forward, ensuring that the US Central Bank will keep rates higher for longer. The hawkish outlook, meanwhile, remains supportive of elevated US Treasury bond yields and acts as a tailwind for the USD. That said, the risk-on impulse holds back the USD bulls from placing aggressive bets. Apart from this, a modest uptick in Crude Oil prices could also underpin the commodity-linked Loonie and cap gains for the USD/CAD pair. The global risk sentiment gets a goodish lift in reaction to the official Chinese PMIs released over the weekend, showing that the manufacturing sector recorded growth for the first time in six months and the services sector remained in expansion territory during September.

Apart from this, the passage of a stopgap funding bill allows the US government to keep operating through November 17 and further boosts investors' confidence. Furthermore, signs that China's economy has begun to stabilise revive hopes for a fuel demand recovery in the world's top Oil importer and lend some support to the black liquid. This might further contribute to keeping a lid on any further appreciating move for the USD/CAD pair. Market participants now look to the release of the US ISM Manufacturing PMI for some impetus later during the early North American session. The focus, however, will remain glued to the closely-watched monthly employment details from the US – popularly known as the NFP report – and Canada on Friday. This, in turn, will play a key role in determining the next leg of a directional move for the major.

Technical Outlook

From a technical perspective, the recent repeated rebounds from the 1.3400 confluence, comprising the 100-day Simple Moving Average (SMA) and the 50% Fibonacci retracement level of the July-September rally, favour bullish traders. Moreover, oscillators on the daily chart have just started gaining positive momentum and support prospects for additional gains. Some follow-through buying beyond the 1.3600 mark will reaffirm the outlook and lift the USD/CAD pair beyond the 1.3635-1.3640 intermediate hurdle, allowing bulls to make a fresh attempt to conquer the 1.3700 round figure.

On the flip side, weakness below the 1.3550 area, or the 23.6% Fibo. level might now be seen as a buying opportunity near the 1.3500 psychological mark. This should help limit the downside near the 38.2% Fibo. level, around the 1.3465 region. A convincing break below the latter will expose the 1.3400 confluence support, which if broken decisively will shift the bias in favour of bearish traders. The USD/CAD pair might then turn vulnerable to accelerate the fall towards the 1.3320 area, or the 61.8% Fibo. level before eventually dropping to the 1.3300 mark en route to the next relevant support near the 1.3240 region.