Chapter 9 08/25 USDCAD: Bulls and Bears at Critical Juncture, Focus on Positioning for Setup
Summary: During the Asian session on Friday, the USDCAD regained momentum below the 1.3600 level, marking a 0.01% intraday increase. Despite a slight pullback during the European session, the U.S. Dollar Index climbed above 104.00 for the first time in 11 weeks, providing support to the asset's price. Investors are focusing on Fed Chairman Powell's speech for potential new catalysts.
Fundamentals
For a second consecutive day, the USDCAD pair garnered positive traction on Friday, reclaiming levels close to the week's earlier highs. Bulls are currently awaiting sustained strength in prices and higher quotes before making new commitments.
Simultaneously, the U.S. Dollar Index rose above 104.00 during the Asian session, finding strong support as the market increasingly accepted the Fed's inclination toward maintaining higher interest rates for an extended period. This, in turn, is considered a pivotal factor driving the USDCAD pair higher.
Moreover, crude oil prices rebounded further from the one-month lows set on Thursday, providing support to the commodity-linked Canadian dollar and acting as resistance to the asset's decline during the European session.
Even from a technical standpoint, the relative strength index (RSI) in the daily chart remains in overbought territory. Therefore, a period of consolidation or minor correction in the near term is deemed highly probable before the next upward move. As such, any further gains are more likely to encounter strong resistance around the 1.3650-1.3655 levels. Subsequent buying interest would then be viewed as a new trigger for the bulls, paving the way for the continuation of the uptrend. Finally, the asset could target the 1.3700 level, marking a perfect conclusion to this round of upward momentum, following a test of the next significant barrier in the 1.3720-1.3740 range.
Looking ahead, close attention will be paid to Fed Chairman Powell's speech at the Jackson Hole Economic Symposium. This speech could offer insights into the economic conditions and hint at whether inflation is under control or if further rate hikes are needed to counter it. Investors will seek trading opportunities around the USDCAD pair based on the cues provided.
Technical Analysis
After hitting a 10-month low of 1.3091 in mid-July, the USDCAD has remained entrenched in an overbought and accelerating uptrend. Furthermore, the asset has breached significant technical levels (89, 100, 233-day SMAs) while consistently marking two-month highs over the past few trading days, establishing a robust foundation for further gains.
Meanwhile, the current momentum indicators suggest that the recent rebound has become excessive. Specifically, the MACD is strengthening above the zero line, with the fast and slow EMAs at their highest levels since March, while the RSI hovers within the overbought zone around 70.
Should the bulls continue to push prices higher, the asset will encounter resistance directly at the April peak of 1.3665. A breakthrough from this range might propel the market toward the psychological level of 1.3700, which held firm in December 2022. The subsequent upward movement might stall around the 1.3720-1.3740 range, concluding the rebound trend from the 10-month low of 1.3091 reached in mid-July.
If further attempts to rally falter, prices could retrace to the recent support level of 1.3496. Breaking through this range could open the door to a downtrend. If prices fail to find support here, the market could descend further to the May resistance level of 1.3385. As prices reach this level, it would signify the formal commencement of a downward structure, with more subsequent selling setting the groundwork for a return to the 10-month low of 1.3091 seen in mid-July.
Lastly, driven by the momentum of the U.S. Dollar Index, the USDCAD pair has been experiencing a robust recovery. However, investors should not rule out the possibility of a correction as prices have entered overbought territory. Nevertheless, the absence of bearish signals amid fundamental support is also a significant market signal that cannot be ignored.
Taking an overall view, the bulls and bears are at a critical juncture. Referring to yesterday's strategy, the focus should be on positioning for setup.
Trading Recommendations
Trading Direction: Long
Entry Price: 1.3530
Target Price: 1.3720
Stop Loss: 1.3410
Valid Until: 2023-09-08 23:55:00
Support: 1.3497, 1.3473, 1.3412
Resistance: 1.3574, 1.3604, 1.3652
