USD/CAD Technical Outlook: Bearish Break Looms as Powell Risks Rise
USD/CAD risks fresh cycle lows as BOC hold bets grow and Fed independence comes under pressure amid Trump’s attacks and rising inflation expectations.
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I highlighted the importance of the 2021 trendline on USD/CAD back in May, where I warned of an eventual breakdown beneath it. While this has since been achieved, bears have made hard work of pushing USD/CAD materially lower. Though I suspect we could be very close to breaking to fresh cycle lows and continuing its bearish trend that began in February, when Trump originally paused tariffs.
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Canadian Dollar Outlook: BOC Policy and Fed Risk Support CAD
The US dollar is facing a fresh wave of selling pressure, with traders questioning Fed independence and betting that Trump will indeed oust Federal Reserve (Fed) chair Jerome Powell. This builds the case for the Fed to cut sooner than later.
Meanwhile, odds of Bank of Canada (BOC) cuts are diminishing, with a broad range inflationary indicators heating up and a recent business sentiment survey suggesting concerns of a recession in Canada are receding. The BOC have already cut seven times this cycle for a total of -225bp from 5% to 2.75%. While they could potentially cut again on July 30, the case of them to hold is growing. Especially now trimmed mean CPI is risen to the top of the BOC’s 1-3% target band.
Chart prepared by Matt Simpson – Data source: Bank of Canada (BOC), London Stock Exchange Group (LSEG).
Canadian Dollar Market Positioning – COT Report
Net-short exposure to Canadian dollar (CAD) futures rose to a 6-week high of 74.1k contracts among large speculators last week. Including asset managers, net-short positioning increased by -10.6k contracts. While this leans bearish for the Canadian dollar in the near term, it’s worth noting that net-short exposure has been trending lower since peaking in August 2024.
And as I suspect the Bank of Canada (BOC) is closer to its terminal rate than the Federal Reserve, the potential remains for the Canadian dollar to strengthen further against the US dollar (USD) over the coming weeks, particularly if bearish traders continue unwinding short positions.
Chart prepared by Matt Simpson – Data Source: CME, LSEG
USD/CAD Technical Analysis: US Dollar vs Canadian Dollar
The weekly chart shows that USD/CAD has been in a sideways consolidation for a couple of months, though momentum has turned briskly lower over the past two days. It failed to break back above the broken 2021 trendline, which has effectively acted as a resistance barrier throughout the consolidation phase.
Notably, the weekly open and close prices have hugged the high-volume node (HVN) from the multi-month range, marking it as a key support zone. A clean break below this level opens the door to a retest of the September low, which also aligns with the 50% Fibonacci retracement from the 2021 low to the 2025 high.
Should prices break beneath 1.3420, the July low comes into focus—just above the 61.8% Fibonacci retracement level and 2023 low near 1.3093.
Chart analysis by Matt Simpson - data source: TradingView USD/CAD
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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