USD/CAD Price Forecast: Bulls remain on the sidelines amid bets for an oversized Fed rate cut

The USD/CAD pair attracts some dip-buying on Friday, albeit lacks follow-through and remains below the 1.3600 mark through the early European session. Crude Oil prices stall this week's strong recovery move from the lowest level since May 2023, led by worries about output disruptions caused by Hurricane Francine in the US Gulf of Mexico, amid a dismal demand outlook. In fact, OPEC on Tuesday lowered its forecast for global oil demand growth in 2024 and also trimmed its expectation for next year, marking the producer group's second consecutive downward revision. Furthermore, the International Energy Agency (IEA) said on Thursday that global oil demand will rise less than previously expected this year in the wake of weak demand in China. This, in turn, caps the upside for the black liquid, which is seen undermining the commodity-linked Loonie and acting as a tailwind for the currency pair. 

The upside for the USD/CAD pair, however, seems limited in the wake of broad-based US Dollar (USD) weakness, triggered by rising bets for a more aggressive policy easing by the Federal Reserve (Fed). The markets are now pricing in a 45% chance that the US central bank will lower borrowing costs by 50 basis points (bps) at the end of a two-day policy meeting on September 18. The bets were lifted following the release of the US Producer Price Index (PPI) on Thursday, which provided further evidence that inflationary was subsiding. The US Bureau of Labor Statistics reported that the annual headline PPI rose 1.7% against estimates of 1.8% and the previous month's reading was revised down to 2.1% from 2.2%. Moreover, the core PPI, which excludes volatile food and energy prices, held steady at the 2.4% YoY rate and missed expectations for a reading of 2.5%, fueling speculations of a super-sized rate cut next week.

Meanwhile, dovish Fed expectations drag the yield on the benchmark 10-year US government bond to its lowest level since May 2023. This, along with a positive risk tone, contributes to the intraday USD slump to over a one-week low and might contribute to keeping a lid on the USD/CAD pair. Traders might also prefer to move to the sidelines and wait for next week's key central bank event risk – the highly-anticipated FOMC monetary policy decision on Wednesday – before placing fresh directional bets. In the meantime, Friday's release of the Preliminary Michigan US Consumer Sentiment Index will be looked upon for short-term trading opportunities. Meanwhile, the mixed fundamental backdrop suggests that a sustained strength above the 1.3600 mark is needed to support prospects for an extension of the recent goodish recovery move from the 1.3440 area, or a multi-month trough touched in August.

Technical Outlook

From a technical perspective, the USD/CAD pair is holding above the 23.6% Fibonacci retracement level of the August downfall and could appreciate further. That said, oscillators on the daily chart are yet to confirm a positive bias, suggesting that any subsequent move up might continue to face resistance near the 38.2% Fibo. level, around the 1.3625-1.3635 region. A sustained strength beyond the said barrier, however, might prompt some technical buying and allow spot prices to reclaim the 1.3700 mark, which coincides with the 50% Fibo. level. 

On the flip side, weakness below the 1.3565 area is likely to attract some buyers and remain limited near the USD/CAD pair. A convincing break below the latter will suggest that the recent bounce witnessed over the past two weeks or so has run its course and make the USD/CAD pair vulnerable to accelerate the slide back towards the 1.3440 region, or the lowest level since March touched last month. The downward trajectory could extend further towards the 1.3400 round figure en route to the late January swing low, around the 1.3360-1.3355 region.

USD/CAD daily chart