USD/CAD Price Forecast: Weakens below 1.4200 as Oil gains, but technicals still favor upside
- USD/CAD softens to around 1.4175 in Wednesday’s early European session.
- The pair maintains constructive outlook in the near term, with bullish RSI momentum.
- The immediate resistance level is located at 1.4248; the first downside target to watch is 1.4145.
The USD/CAD pair loses traction to near 1.4175 during the early European trading hours on Wednesday. Renewed US military strikes against Iran have boosted crude oil prices and provide some support to the commodity-linked Canadian Dollar (CAD) strengthens against the US Dollar (USD).
Reuters reported on Wednesday that the Islamic Revolutionary Guard Corps (IRGC) said they attacked US military sites in Bahrain and Kuwait after the US launched a wave of strikes against Iran in response to attacks on tankers in the Strait of Hormuz. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
"For now, the market is keeping to the playbook that Tehran and Washington are still in a high-stakes game to gain leverage during the temporary truce, and that Tuesday’s incident would not descend back into a full-scale war," DBS analysts wrote in a research report.
Technical Analysis:
In the daily chart, USD/CAD retains a bullish near-term bias as spot holds above the Bollinger Bands’ 20-period middle simple moving average and comfortably over the 100-day moving average. The pair is advancing along the upper half of the Bollinger envelope, while the Relative Strength Index (14) around 66 stays in positive territory but shy of overbought, suggesting firm upside pressure with some room for further gains before stretched conditions become acute.
On the topside, the first upside barrier emerges at the June 24 high of 1.4248. The next notable resistance is the Bollinger Bands’ upper band, coming in around 1.4315 and marking the immediate cap for the current advance.
On the downside, initial support is located at the Bollinger middle band at 1.4145. The crucual contention level is seen at the 1.4000 psychological level ahead of a deeper cushion at the lower band near 1.3975, with the 100-day moving average at 1.3827 reinforcing the broader bullish structure as long as USD/CAD holds above it.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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