Bullish Momentum Faces Stern Resistance

USD/CAD Analysis

Slowing Economy Weighs on Future Monetary Policy Guidance

The surprise economic contraction experienced in Q2 reflects the tightening of financial conditions in Canada as a result of historically fast acceleration in the benchmark interest rate. Q2 revealed declining growth which, when annualized as a percentage, represents a yearly decline of 0.2%. However, the Bank of Canada (BoC) warned that rates may need to rise in the event inflation pressures reemerge. Headline inflation rose fr0m 2.8% to 3.3% in August and the rise in oil prices presents further complications to the inflationary outlook.

USD/CAD remains well within the existing uptrend but signs of potential fatigue have appeared around current levels. The extended upper candle wicks around the significant 61.8% Fibonacci retracement (1.3650) suggests a rejection of higher prices. The RSI also reveals that the current bullish trend is at risk of overheating as it enters overbought territory.

1.3855 is the longer-term level of resistance should bulls outmuscle bears above 1.3650 but those in favour of the pair heading lower from here will be eying the 1.3503 level and the 200 simple moving average. US CPI next week will play a huge role in determining the shorter-term direction of the pair. The pair may receive a reprieve should inflationary pressures in the US subside.

USD/CAD Daily Chart

Source: TradingView, prepared by Richard Snow

IG Client Sentiment Mixed Despite Heavily One-Sided Positioning

IG Client Sentiment: USD/CAD

Source: TradingView, prepared by Richard Snow

USD/CAD: Retail trader data shows 28.35% of traders are net-long with the ratio of traders short to long at 2.53 to 1. However, the combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

Read the guide below for more information on how to read the contrarian indicator and why shorter-term sentiment shifts provide an important signal:

The weekly chart provides a better perspective of the shorter-term bullish move against the longer-term trend. After bouncing off trendline support, USD/CAD rallied impressively into the current zone of resistance around 1.3650/1.3700. Incoming US data will be largely influential in determining whether the bull trend gains momentum from here or subsides. As the global economy nears a major turning point (reaching peak interest rates) FX markets have become even more sensitised to news flow and incoming data. Yesterday’s better-than-expected US services PMI data propelled the dollar higher and momentarily had money markets favouring a 25 basis point hike in November.

USD/CAD Weekly Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX