Short-term bullish breakout in play ahead of FOMC minutes

• USD/CAD gains positive traction for sixth straight day amid bullish USD.
• The overnight drop in oil prices undermines the Loonie and remains supportive.
• Acceptance above 200-day SMA favors bulls ahead of FOMC minutes.

The USD/CAD pair attracted buyers for a sixth straight day on Wednesday and traded around the 1.3665 area during the early European session, just below the highest level since August 19 hit the previous day. The geopolitical risk premium fell slightly on news of a possible ceasefire between Lebanon’s Hezbollah and Israel, which sent crude oil prices lower overnight. This, along with expectations for a further rate cut by the Bank of Canada (BoC), is undermining the commodity-linked Loonie and acting as a tailwind for the pair amid a modest rise in the US dollar (USD).

Investors were betting on more aggressive policy easing by the Federal Reserve (Fed) amid signs of a still resilient US labor market and another interest rate cut in November. That keeps the benchmark 10-year U.S. Treasury yield above the 4 percent mark and the USD index ( DXY ), which tracks the greenback against a basket of currencies, near a seven-week high hit last Friday. Apart from this, a generally weaker tone around the equity markets is providing support for the safe-haven dollar and is proving to be another factor contributing to the positive movement of the USD/CAD pair.

The upward trajectory could further be attributed to some technical buying following this week’s sustained breakout through a technically significant resistance at the 200-day simple moving average (SMA) near the 1.3600 mark. Bulls, however, may refrain from placing aggressive bets and prefer to wait for the publication of the FOMC meeting minutes later during the North American session. Investors this week will continue to face the release of the US Consumer Price Index (CPI) and the US Producer Price Index (PPI), which will be scrutinized for clues about the Fed’s rate-cutting trajectory and the impact USD.

Apart from this, Friday’s monthly Canadian employment report will help determine the next stage of a directional move for the USD/CAD pair. However, the aforementioned fundamental context, along with a bullish technical setup, suggests that the path of least resistance for spot prices remains up. Therefore, any corrective pullback could be seen as a buying opportunity and is more likely to remain muted.

Technical perspectives

Technically, the USD/CAD pair looks poised to extend its recent upward trajectory seen over the past two weeks or so. The constructive outlook is reinforced by the fact that oscillators on the daily chart have gained positive traction and are still far from overbought territory. Therefore, further strength towards the recovery of the 1.3700 mark, en route to the 1.3725-1.3730 supply zone, seems a distinct possibility. Some further buying has the potential to lift spot prices beyond the 1.3760-1.3765 intermediate hurdle, towards the recovery of the 1.3800 round figure.

On the other hand, the 1.3625-1.3620 horizontal area now appears to protect the immediate downside ahead of the 200-day SMA breakout around 1.3600. Any further decline could be seen as a buying opportunity and remains capped near the 1.3545-1.3540 region. The latter should act as a key pivotal point, which, if decisively broken, will nullify the positive outlook and expose the psychological mark of 1.3500. The USD/CAD pair could slip further to the 1.3465-1.3460 support before finally dropping to the 1.3420 area, or the lowest level since March.

USD/CAD Daily Chart