Bears await a break below the 50-day SMA/61.8% Fibo. confluence support

• USD/CAD is consolidating its recent heavy losses to a multi-week low hit on Friday.
• Middle East tensions are pushing up oil prices, supporting the Loonie and capping spot prices.
• The downside remains cushioned ahead of crucial US inflation numbers due this week.

The USD/CAD pair is struggling to gain any meaningful traction at the start of a new week and remains near a three-week low around the 1.3720-1.3715 region reached on Friday. Crude oil prices are holding on to last week’s strong gains of more than 3 percent amid rising geopolitical tensions in the Middle East, which are seen as supporting the commodity-linked Loonie and acting as a headwind for the currency pair. The Israeli intelligence community believed that Iran had decided to attack Israel directly and could do so within days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July.

Meanwhile, US Defense Secretary Lloyd Austin told his Israeli counterpart Yoav Gallant that he had ordered the carrier strike group USS Abraham Lincoln to expedite its transit to the Middle East and the guided-missile submarine USS Georgia to the Central Command region. That poses the risk of a wider conflict in the key producing region and lifted the black liquid to a one-week high on Monday. Additionally, the dovish expectations of the Federal Reserve (Fed) keep the US Dollar (USD) bear on the defensive and further help to limit the USD/CAD pair’s advantage in the first European session.

Markets have fully priced in a 25 basis point (bps) Fed rate cut at the September policy meeting and see the possibility of a further 50 basis point rate cut. This, along with a generally positive tone around equity markets, continues to weigh on the Greenback. The downside for the USD/CAD pair remains muted, however, following Friday’s mixed Canadian jobs data, which reaffirmed market bets for another 25bps rate cut by the Bank of Canada (BoC) in September. Statistics Canada reported that the number of people employed fell by 2.8 thousand in July, while the unemployment rate held steady at 6.4 per cent.

Traders also appear reluctant to place aggressive directional bets and prefer to wait on the sidelines ahead of the release this week of the latest US inflation figures – Producer Price Index (PPI) and Consumer Price Index (CPI) on Tuesday and, respectively, on Wednesday. However, the fundamental backdrop warrants some caution before confirming that USD/CAD’s recent sharp pullback from the mid-1.3900s, or the October 2022 high reached last Monday, has run its course.

Technical perspectives

Technically, the USD/CAD pair has so far managed to defend a confluence support near the 1.3720-1.3715 area – comprising the 50-day Simple Moving Average (SMA) and the Fibonacci retracement level of 61, 8% of the 1.3589-1.3947 rally. With the oscillators on the daily chart holding in negative territory, a convincing break below will be seen as a new trigger for bear traders and pave the way for deeper losses. The USD/CAD pair could then accelerate the decline towards the 78.6% Fibo. level, around the 1.3665 region, before finally dropping to levels below 1.3600, or the monthly swing low in July.

On the other hand, any attempted recovery is likely to face immediate resistance near the 1.3770 area or the 50% Fibo. level, before the 1.3800 mark. Some further buying could cancel the short-term downtrend and lift the USD/CAD pair to the 1.3850 region on the way to the intermediate barrier of 1.3875 and the round figure of 1.3900. The momentum could extend further and allow the bulls to aim back to challenge the YTD peak around the 1.3945-1.3950 area.