USD/CAD, Gold Forecast: Two trades to watch

USD/CAD rises as US-Canada tensions escalate

USD/CAD is recovering from a multi-month low, moving towards 1.3820 on Monday as the Canadian dollar weakens after US-Canada trade talks broke down over the weekend.

The U.S. imposed 50% tariffs on a range of Canadian exports worth around $20 billion on Saturday after negotiations between the two countries collapsed. Canada is set to retaliate with tariffs from September 8, adding another source of uncertainty for the loonie.

However, the outlook for oil could limit the upside in USD/CAD. Rising tensions in the Middle East are keeping crude prices supported, while Iran's foreign minister has dismissed the threat of further U.S. sanctions. Oil prices rose around 20% in July and have held onto most of those gains so far in August.

That matters for the Canadian dollar because Canada is a major oil exporter. Higher crude prices can therefore provide some support for the loonie and offset some of the pressure coming from the trade dispute.

The U.S. dollar is also recovering after falling almost 1% last week and reaching a multi-month low. The recent weakness followed the U.S. Treasury's intervention in the long-end of the bond market, which pushed Treasury yields lower and added to concerns around the U.S. fiscal outlook and the dollar.

This week could provide a fresh catalyst for USD/CAD, with U.S. core PCE inflation due on Wednesday followed by Federal Reserve Chair Kevin Warsh speaking at Jackson Hole on Friday.

A hotter PCE reading or hawkish comments from Warsh could lift the dollar and push USD/CAD higher. A softer inflation reading, combined with elevated oil prices, could favour the Canadian dollar and limit the recovery in the pair.

USD/CAD forecast – technical analysis

USD/CAD trades within a falling channel dating since early July, falling to a low of 1.3730. The hammer candlestick suggests a potential bullish reversal, while the recovery is also bringing the RSI out of oversold territory.

Buyers will look to extend gains towards 1.3900, the 200 EMA, and 1.3925, the upper band of the falling channel and January high. A break above this zone would make the outlook more constructive, bringing 1.3965, the March high and 50 EMA, into focus. Above here, attention turns to the psychological 1.4000 level.

On the downside, support is seen at 1.3730, the August low. A break below this level would create a lower low, turning attention towards 1.3700, followed by 1.3600 and 1.3550, the May low.

Gold extends rally to fresh three-month high

Gold is extending last week's 5% rally, climbing to its highest level since May 15 and moving towards $4,700 as the U.S. Treasury's intervention in the bond market weighs on the dollar.

U.S. Treasury Secretary Scott Bessent said on Thursday that the government could increase Treasury purchases beyond $4 billion per operation. The comments came after the Treasury announced plans to double buybacks of longer-dated securities on Wednesday.

The move has helped push Treasury yields lower, taking some support away from the U.S. dollar and creating a more favourable backdrop for gold.

Falling yields reduce the opportunity cost of holding a non-yielding asset such as gold, while a weaker dollar makes the metal cheaper for international buyers.

The rally is also being supported by growing concerns over the U.S. fiscal outlook. With national debt now above $40 trillion, investors are increasingly looking towards assets such as gold as a hedge against currency debasement and the erosion of purchasing power.

However, the outlook is not without risks.

Oil prices remain elevated as tensions in the Middle East continue, keeping inflation concerns alive. The U.S. has threatened further economic sanctions against Iran, with Bessent due to speak later today. The market will be watching closely for any indication that China could also be targeted.

Higher oil prices could complicate the Federal Reserve's policy outlook by keeping inflation elevated. If markets begin to price a more hawkish Fed as a result, Treasury yields and the dollar could rebound, limiting gold's upside.

Attention this week will also be on U.S. core PCE, the Fed's preferred inflation gauge, which is expected to remain at 3.3% in July, followed by Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole Symposium on Friday.

With markets pricing a 65% probability that the Fed will leave rates unchanged in September, the policy outlook remains finely balanced.

A softer PCE reading and a cautious Warsh could keep yields and the dollar under pressure, potentially opening the door to $4,700 and beyond. A hotter inflation reading or hawkish Fed signal would make the rally much harder to sustain.

Gold forecast - technical analysis

Gold has broken out of the symmetrical triangle pattern, rising above its 50 and 200 EMA to a three-month high of 46.60. The RSI has slipped into overbought territory, so a period of consolidation or a move lower could be on the cards. The 50 EMA is on the verge of crossing above the 200 EMA in what would be a golden cross bullish signal.

Buyers will look to extend gains towards 4,770, the 50% Fib retracement of the 5,598 high, 3,940 low. Above here, attention turns to 4965, the 61.8% Fibonacci retracement level, and 5000, the psychological level.

On the down side, immediate support is seen at 4,570, the 38.2% Fib retracement. A break below here opens the door to 4,330, the 23.6% Fib level, ahead of 4,300, the 200 EMA. A break below here could see sellers gain traction towards 4,100, the March low.