Looks vulnerable near a multi-month low, 200-day SMA breakdown in play

• USD/CAD is struggling near a multi-month low despite a mix of supportive factors.
• The rebound in US bond yields is helping to revive USD demand, though it’s doing nothing to impress the bulls.
• Crude oil prices, which tend to undercut the Loonie, are also failing to provide support.

The USD/CAD pair remains under some selling pressure for a fifth straight day on Thursday and is near its lowest level since April 10 around the 1.3585-1.3580 region during the early European session. The Canadian dollar (CAD) continues to attract flows following the recent narrowing of the spread between Canada’s 2-year rate and its US counterpart. Investors now appear confident that the Federal Reserve (Fed) will join the Bank of Canada (BoC) in an aggressive policy easing cycle and have priced in the possibility of a larger-than-normal interest rate cut in September.

In fact, CME Group’s FedWatch tool points to a 38% probability of a 50 basis point (bps) rate cut next month, up from 29% the day before and a cut of about 100 basis points until the end of this year. The stakes were raised by a report on Wednesday that suggested the labor market was not as strong as expected. The preliminary annual analysis of the employment report released by the US Bureau of Labor Statistics showed that US employers added 818,000 fewer jobs than reported in the year to March. This supports the outlook for lower US interest rates.

Additionally, the minutes of the July 30-31 FOMC meeting revealed that the vast majority of officials supported the case for a rate cut in September, with some policymakers leaning toward immediate action. This helps offset crude oil prices, which tends to undercut the commodity-linked Loonie, and is proving to be a key factor pulling down the USD/CAD pair. Despite the risk of a wider conflict in the Middle East, worries about the outlook for global demand are keeping the crucible depressed near the February lows reached earlier this month.

Furthermore, a modest retracement of the US dollar (USD) from the YTD low hit on Wednesday fails to support the USD/CAD pair. Market participants are now looking to the US economic record – which includes the usual release of initial weekly unemployment data and data on existing home sales. Still, the focus remains on Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday, which will be scrutinized for clarity on whether a softer US labor market supports the case for a bigger rate cut next month . This, in turn, will boost USD demand in the short term.

Technical perspectives

From a technical perspective, the overnight breakdown and close below the all-important 200-day simple moving average (SMA) for the first time since March was seen as a new trigger for bearish traders. That being said, the Relative Strength Index (RSI) on the daily chart has just started to move into oversold territory. This makes it prudent to wait for a near-term consolidation or modest rebound before positioning for any further bearish moves.

However, any recovery attempt is more likely to face stiff resistance near the 1.3600 threshold or the break point of the 200-day SMA support. Moreover, a further move up could be seen as a selling opportunity and risks getting exhausted quite quickly near the 1.3645-1.3650 region. The latter should act as a key pivotal point which, if decisively removed, could cause a short-covering move and pave the way for significant upside for the USD/CAD pair.

On the other hand, the horizontal area of ​​1.3535 could provide some support before the psychological mark of 1.3500. Some further selling will set the stage for an extension of the recent sharp pullback slide from the mid-1.3900s, or the October 2022 high reached earlier this month. The USD/CAD pair could then accelerate the decline towards the 1.3460 area on the way to the March swing around the 1.3420 region and the round figure of 1.3400.

USD/CAD Daily Chart