USD/CAD Price Forecast: Bulls turn cautious amid slightly overbought RSI

• USD/CAD is seen consolidating its recent strong move up to the highest level since May 2020.
• An uptick in Oil prices underpins the Loonie and caps the pair amid a modest USD weakness.
• The fundamental backdrop supports prospects for a further appreciating move for the major.

The USD/CAD pair enters a bullish consolidation phase at the start of a new week and oscillates in a narrow range below the 141.00 mark, or its highest level since May 2020 set on Friday. Crude Oil prices rebound after touching a two-month low earlier this Monday amid reports of the US allowing Ukraine to use US-supplied long-range missiles to strike deeper inside Russia. Apart from this, escalating geopolitical tensions in the Middle East raise concerns over possible oil supply disruptions and offer some support to the black liquid. This, in turn, underpins the commodity-linked Loonie. This, along with a modest US Dollar (USD) downtick, turns out to be a key factor acting as a headwind for the currency pair. 

Meanwhile, investors remain worried about slowing fuel demand in China – the world's second-largest consumer. Adding to this, forecasts of a global oil surplus should keep a lid on any meaningful upside for the commodity. Furthermore, speculations about a more aggressive policy easing by the Bank of Canada (BoC) should cap gains for the Canadian Dollar (CAD). This, along with less dovish Federal Reserve (Fed) expectations, favors the USD bulls and supports and suggests that the path of least resistance for the USD/CAD pair remains to the upside. Investors now seem convinced that US President-elect Donald Trump's touted expansionary policy would stoke inflation and slow the Fed's rate easing cycle. 

Adding to this, the recent comments from influential FOMC members, including Fed Chair Jerome Powell, forced investors to scale back their bet for another interest rate cut this year. In fact, Powell said last Thursday that with the economy still growing, the job market solid and inflation still above the 2% target, the central bank need not rush to ease monetary policy. Moreover, Boston Fed President Susan Collins noted on Friday that another rate cut in December is on the table, but it is not a "done deal".  Separately, Chicago Fed President Austan Goolsbee said that the recent inflation has been a little higher than the target and if we started to see a reversal, we would have to figure out if it is a bump. 

This remains of elevated US Treasury bond yields, validating the near-term bullish outlook for the USD and the USD/CAD pair. Hence, any corrective pullback might still be seen as a buying opportunity and remain limited in the absence of any relevant market-moving economic releases on Monday, either from the US or Canada.

Technical Outlook

The Relative Strength Index (RSI) on the daily chart is flashing slightly overbought conditions and makes it prudent to wait for some near-term consolidation or a modest pullback before the next leg up. In the meantime, the daily swing low, around the 1.4070-1.4075 region, now seems to protect the immediate downside, below which the USD/CAD pair could drop to the 1.4030 area en route to the 1.4000 psychological mark. The subsequent fall could drag spot prices to the 1.3960-1.3955 horizontal resistance breakpoint, now turned support, which should now act as a key pivotal point and a strong near-term base.

On the flip side, bulls need to wait for acceptance above the 1.4100 mark before placing fresh bets. The USD/CAD pair might then accelerate the move towards the 1.4170 area before aiming to reclaim the 1.4200 round figure for the first time since April 2020. The upward trajectory could extend further towards mid-1.4200s en route to the 1.4300 mark and the 1.4340 supply zone.

USD/CAD daily chart