The US dollar is breaking to a new monthly high against the Canadian dollar, following a move lower in oil prices due to the US Democratic Party’s failure to secure the Build Back Better deal over the weekend.
For now, things look pretty bullish for the USDCAD pair from a technical and fundamental perspective. The recent move by the FED to double tapering, and potentially end the program by March is likely to keep the buck bid.
Certainly, the Bank of Canada is a consideration when trading this pair because the central bank is likely to raise rates next year, as Canadian policymakers announce that every meeting is a “live one”.
The central bank is not shy in expressing that inflation expectations are starting to become unanchored, and this is likely to be a big concern, and a reason to raise rates, despite Omicron.
Currency markets are forward, looking, but with the BoC meeting five weeks away, the US dollar has significant room to run higher. The US dollar index is not yet starting to show signs of upside exhaustion and is likely to break to new highs.
Additionally, as Omicron rages, USDCAD and crude oil could take a meaningful dive lower. If we see oil prices falling sharply, and the US dollar index breaking to new highs then the USDCAD posting further gains seems highly likely.
Relatively high levels of negative sentiment are currently being seen towards the USDCAD pair, with some 60 percent of traders holding a negative view towards the USDCAD pair. This bearish sentiment bias is a warning of more short-term gains ahead.
USDCAD Short-Term Technical Analysis
The four-hour time frame shows that a large, inverted head and shoulders pattern continues to form, with a push above the 1.2950 level needed to ignite the bullish price pattern.
Significant upside potential exists if we measure the pattern from neckline to floor, with the pattern holding an upside target that extends towards the 1.3200 support area. Watch out for further gains if the inverted head and shoulders pattern plays out.
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USDCAD Medium-Term Technical Analysis
A massive, inverted head and shoulders pattern has formed, which could spell the start of a powerful new bullish trend in the USDCAD pair. This could also hint that oil prices are heading lower.
Much will depend on oil prices and the breakout in the US dollar index over the coming days to determine whether the massive pattern, with over 600 points of upside potential is ignited to the upside.
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