USD/CAD Outlook: Bulls look to seize control on stronger USD, subdued Oil prices

• USD/CAD scales higher for the third straight day, recovering further from the year-to-date trough.
• Tuesday’s softer Canadian CPI, subdued Oil prices undermine the Loonie.
• The Fed’s hawkish outlook lifts the USD to a two-week high and contributes to the bid tone.

The USD/CAD pair gains traction for the third successive day on Thursday and looks to build on this week's recovery from the 1.3115 area, or its lowest level since September 2022. Crude Oil prices struggle to capitalize on the overnight gains as investors remain worried that rising borrowing costs will dampen economic growth and dent global fuel demand. Apart from this, softer Canadian data released on Tuesday, which showed that consumer inflation eased to its slowest pace in two years, undermines the commodity-linked Loonie. The US Dollar (USD), on the other hand, hits a two-week high in reaction to the overnight hawkish remarks by Federal Reserve (Fed) Chair Jerome Powell and turns out to be a key factor acting as a tailwind for the major.

Speaking at a European Central Bank (ECB) conference, Powell reiterated that two rate increases are likely this year and also said that he does not see core inflation coming down to the Fed's 2% target until 2025. This reaffirms market bets for a 25 bps lift-off at the next FOMC policy meeting on July 25-26, which is seen pushing the US Treasury bond yields higher and lending support to the buck. Furthermore, the worsening global economic outlook, along with concerns about deteriorating US-China relations, benefit the Greenback's relative safe-haven status and provides an additional boost to the USD/CAD pair. The Wall Street Journal reported on Tuesday that the US is considering new restrictions on exports of artificial intelligence chips to China.

This adds to worries about slowing post-pandemic economic recovery in China, which should keep a lid on any meaningful upside for Oil prices and support prospects for a further near-term appreciating move. Investors will look for more cues from the officail Chinese PMI prints due on Friday. The focus, however, remains glued to the release of the US Core PCE Price Index – the Fed's preferred inflation gauge. The crucial data should influence expectations about the Fed's future rate-hike path, which will determine the near-term trajectory for the buck and the USD/CAD pair. In the meantime, Thursday's US economic docket – featuring the final Q1 GDP print, the Weekly Initial Jobless Claims and Pending Home Sales – might provide some impetus.

Technical Outlook

From a technical perspective, the USD/CAD pair seems to have found acceptance above the 23.6% Fibonacci retracement level of the recent slide from the 1.3650-1.3655 area, or the May monthly peak. A subsequent move beyond the 100-period Simple Moving Average (SMA) on the 4-hour chart – for the first time since June 1 – favours bullish traders. That said, the Relative Strength Index (RSI) on hourly charts has moved on the verge of breaking into the overbought territory. Moreover, oscillators on the daily chart – though have been recovering – are yet to confirm a positive outlook and warrant some caution before positioning for any further appreciating move.

Hence, any follow-through move up is more likely to confront stiff resistance near the 1.3300-1.3310 point, which coincides with the 38.2% Fibo. level. This area should act as a pivotal point, which if cleared decisively might trigger a short-covering rally and lift the USD/CAD pair towards the 1.3380-1.3385 confluence – comprising the 200-period SMA on the 4-hour chart and the 50% Fibo. level. A convincing break through the latter will suggest that spot prices have formed a near-term bottom and pave the way for some meaningful appreciating move in the near-term.

On the flip side, the 23.6% Fibo. level, around the 1.3245-1.3240 region, seems to protect the immediate downside ahead of the 1.3200 round figure. Failure to defend this support levels will indicate that the corretive bounce has run its course and make the USD/CAD pair vulnerable to weaken further below the 1.3140 intermediate support, towards challenging the year-to-date low. Some follow-through selling below the 1.3100 mark will expose the next relevant support near the 1.3060-1.3050 area. Spot prices could eventually drop to the 1.3000 psychological mark en route to the September 2022 swing low, around the 1.2955 zone.