Canadian Dollar Outlook: USD/CAD Poised for Further Losses After Support Breakout

USD/CAD TECHNICAL FORECAST:

• USD/CAD has broken below confluence support near the 1.2600 zone, a bearish signal for price action
• The broader outlook remains tilted to the downside
• From a fundamental point of view, the Canadian dollar maintains a constructive profile

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At the start of the week, I argued that USD/CAD could head lower and breach confluence support near the 1.2600 area should risk sentiment remain positive. Over the past few days, the market mood has been more stable and less panicky, so the bearish thesis played out well as shown in the daily chart below. After the breakout, there was some brief congestion, but consolidation appears to be resolving to the downside, with the exchange rate drifting towards 1.2515 at the time of writing.

Overall, the near-term outlook continues to tilt downward, and will remain so as long as the pair sustains the recent breakout and stays below its 200-day simple moving average, a useful trend indicator. If this scenario materializes, sellers could regain decisive control of the market, setting the stage for the next leg lower, in which case, the focus will shift down to the January lows near 1.2450.

In the event of a bullish reversal, traders should watch how prices react around the 1.2600 area, which is now the most immediate technical resistance to consider. If the bulls manage to clear this hurdle convincingly, USD/CAD could make headways and challenge the 50-day SMA located at 1.2690. On further strength, we can’t rule out on assault on 1.2800.

From a fundamental point of view, the Canadian dollar looks attractive against the greenback. The Bank of Canada’s pledge to withdraw stimulus forcefully to contain inflation, the country’s strong labor market and improving terms of trade driven by rising oil prices are all bullish catalysts. Although the Russia-Ukraine war is a wild card and can unexpectedly hit riskier currencies, we have not seen a major escalation in recent days. That said, if the crisis does deteriorate, the loonie could remain supported.

USD/CAD TECHNICAL CHART

USD/CAD chart prepared using TradingView

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—Written by Diego Colman, Contributor