Will USD/CAD continue falling or buck its sharp downtrend?

USD/CAD has been entrenched in an exceptionally sharp plunge for nearly two months as the US dollar has fallen substantially from its highs, oil has staged a significant comeback from its recent long-term lows, and the Bank of Canada opted to keep interest rates on hold instead of cutting rates last week. The resulting USD/CAD slide has pressured the currency pair from its January multi-year highs above 1.4600 resistance down to the current four-month lows around 1.3200 support.

In the course of this free fall, USD/CAD has broken down below multiple key support levels, including 1.3600 and 1.3400, and both its 50-day and 200-day moving averages. Currently, the currency pair has dropped down to a major confluence of support at both the noted 1.3200 level as well as a major uptrend support line extending all the way back to the mid-2014 lows. Additionally, technical indicators are signaling that USD/CAD has been well oversold since at least late-February.

With the currency pair currently at a critical technical juncture, its short-term fate could likely be affected by a few upcoming developments. First, the US FOMC meeting and statement on Wednesday should provide a glimpse as to the Federal Reserve’s near-term monetary policy stance. Although the Fed is not expected to raise interest rates at this meeting, its policy comments should be especially important in light of the European Central Bank’s announcement of substantial rate cuts and easing measures last week. If the Fed maintains its relatively hawkish "wait-and-see" outlook, the US dollar could continue to be supported. In the event that the Fed becomes pressured to take on a more dovish stance, however, the US dollar could break down further.

Of course, the continually unfolding saga surrounding crude oil and major oil-producing nations will also be instrumental in the near-future trajectory of USD/CAD, as the Canadian dollar is highly correlated with crude oil due to Canada’s substantial reliance on oil-related exports. While the price of crude oil has rebounded and recovered significantly for more than a month due to ongoing speculation of a potential deal to cap crude output by some OPEC nations and Russia, comments this past weekend from Iran have placed somewhat of a damper on that speculation. Specifically, Iran’s oil minister stated that the country would only participate in the output freeze when it reached production of 4 million barrels per day, which is around 2 million more barrels per day than current production levels.

As negotiations among the major oil-producing nations continue, new developments surrounding crude oil should have a significant impact on the Canadian dollar. Add to that the potential impact of the Fed’s policy outlook, and USD/CAD could make some significant moves this week and for the second half of this month.

Technically, with any breakdown below the noted trend line and 1.3200 support, the major downside targets are at the 1.3000 psychological level followed by the key 1.2800 support level. To the upside, any relief rally or bounce from the current support should meet major resistance around the noted 1.3600 resistance level.

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