USD/CAD Outlook: Bullish potential intact, seems poised to surpass 1.3700 mark


  • USD/CAD regains positive traction on Thursday amid resurgent USD demand.
  • Hawkish Fed expectations, elevated US bond yields lend support to the buck.
  • Subdued Oil prices undermine the Loonie and act as a tailwind for the major.

The USD/CAD pair attracts fresh buying during the Asian session on Thursday and reverses a major part of the previous day’s retracement slide from the 1.3660 supply zone. The overnight optimism led by the upbeat Chinese PMIs fades rather quickly amid worries that rapidly rising borrowing costs will dampen economic growth and dent fuel demand. This, in turn, keeps a lid on the recent move up in Crude Oil prices to a one-and-half-week high and undermines the commodity-linked Loonie. Apart from this, a goodish pickup in the US Dollar demand, bolstered by hawkish Fed expectations, acts as a tailwind for the major and remains supportive of the intraday positive move.

The US central bank is universally expected to stick to its hawkish stance in the wake of stubbornly high inflation. The bets were reaffirmed by hawkish remarks by Fed officials. In fact, Atlanta Fed President Raphael Bostic maintained the view the policy rate needs to rise to the 5.00%-5.25% range and remain at that level well into 2024. Furthermore, Minneapolis Fed President Neel Kashkari reiterated that inflation in the US is still very high and that their job is to bring it down. Karikari also noted that the risk of under-tightening is greater than the risk of over-tightening. This, in turn, pushes the yield on the benchmark 10-year US government bond above 4.0% and boosts the buck.

Apart from this, a softer risk tone drives heaven flows towards the Greenback and offers additional support to the USD/CAD pair. 
The market sentiment remains fragile amid looming recession risks. The fears were further fueled by Wednesday’s release of the US ISM Manufacturing PMI, which remained in contraction territory for the fourth successive month in February. The Prices Paid sub-component, however, accelerated to 51.3 from 44 and further raised concerns about inflation, which should allow the Fed to keep interest rates higher for longer. In contrast, softer Canadian CPI released last week fueled speculations that the Bank of Canada (BoC) could pause the policy-tightening cycle.

The aforementioned fundamental backdrops favour the USD/CAD bulls and suggest that the path of least resistance for spot prices is to the upside. Market participants now look to the release of the usual Weekly Initial Jobless Claims data from the US, due later during the early North American session. Apart from this, speeches by influential FOMC members, the US bond yields and the broader risk sentiment will drive the USD demand. Traders will further take cues from oil price dynamics to grab short-term opportunities.

Technical Outlook

From a technical perspective, any subsequent move up might continue to face some resistance near the 1.3660-1.3665 area ahead of the YTD peak, around the 1.3685 level touched in January and the 1.3700 round-figure mark. Some follow-through buying will be seen as a fresh trigger for bullish traders and set the stage for an extension of the recent strong rally witnessed over the past two weeks or so. The USD/CAD pair might then surpass an intermediate hurdle near the 1.3740-1.3745 region and aim to reclaim the 1.3800 mark for the first time since November 2022.

On the flip side, the 1.3585-1.3580 zone now seems to have emerged as immediate support. Any further decline might still be seen as a buying opportunity and is more likely to remain limited near the 100-day Simple Moving Average (SMA), currently around the 1.3500 psychological mark. That said, a convincing break below the said handle might prompt some technical selling and drag the USD/CAD pair towards the 1.3440 horizontal support, en route to the 1.3400 mark.