• USD/CAD falls to a new multi-week low despite a combination of supportive factors.
• Falling crude oil prices and a modest recovery in the US dollar are doing little to ease downward pressure.
• Traders are hoping that Canada’s Consumer Price Index (CPI) will provide some momentum ahead of the release of FOMC minutes on Wednesday.

The USD/CAD pair is declining for the third straight day on Tuesday, falling to a five-week low in the 1.3625-1.3625 range at the start of the European session but remains sequential. The selling bias in crude oil prices remains unabated for the third straight day amid hopes of a ceasefire in Gaza, undermining the commodity-dependent loonie and providing a tailwind for the currency pair. In fact, US Secretary of State Antony Blinken said on Monday that Israeli Prime Minister Benjamin Netanyahu had accepted a bridge proposal to resolve the differences preventing a ceasefire and also called on Hamas to do the same, helping to ease concerns about a wider conflict in the Middle East and supply disruptions from the key oil-producing region.

Moreover, concerns over an economic slowdown in China – the world’s largest oil importer – are dragging the black currency to a nearly two-week low. Apart from that, a modest recovery in the US dollar (USD) from its lowest level since January is proving to be another factor supporting the USD/CAD pair. However, the greenback’s upside potential remains limited amid dovish expectations from the Federal Reserve (Fed). In fact, CME Group’s FedWatch tool suggests that there is a higher probability that the Fed will begin its rate-cutting cycle at the September meeting and cut borrowing costs by over 200 basis points by the end of 2025. The bets have been reinforced by dovish comments from Fed officials that could put a brake on any meaningful gains for the USD and the currency pair.

Chicago Fed President Austan Goolsbee said the U.S. economy is not showing signs of overheating, so central bank officials should be cautious about maintaining tight monetary policy longer than necessary. Separately, San Francisco Fed President Mary Daly downplayed concerns about a sharp slowdown in the U.S. economy but said the U.S. central bank needs to take a gradual approach to lower borrowing costs. In addition, Minneapolis Fed President Neel Kashkari said on Monday that a debate about a possible September rate cut is appropriate as the risk weight has shifted more toward the labor market. This, in turn, justifies some caution for USD bulls before confirming that the USD/CAD pair has bottomed out.

Traders may also prefer to wait for further clues on the Fed’s rate cut path before making aggressive directional bets. Therefore, the focus remains on the release of the July FOMC meeting minutes, which, along with Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday, will boost USD demand and provide a significant boost to the USD/CAD pair. Meanwhile, the release of the latest consumer inflation numbers from Canada on Tuesday will be scrutinized for short-term trading opportunities. The expected decline in the Canadian consumer price index for the second consecutive month could allow the Bank of Canada (BoC) to pursue a more accommodative policy, which should weigh on the Canadian dollar (CAD) and help the USD/CAD pair stage a significant recovery.

Technical outlook

From a technical perspective, the recent break through the 1.3725 confluence support – consisting of the 50-day SMA and the 61.8% Fibonacci retracement level of the July-August rally – was seen as a key trigger for bearish traders. Moreover, the oscillators on the daily chart remain deep in the negative territory and are still far from the oversold zone. This, in turn, suggests that the path of least resistance for the USD/CAD pair is still to the downside. Therefore, a subsequent drop to levels below 1.3600 or the July monthly swing low seems quite possible. The latter is close to the very important 200-day SMA, below which the downside move could continue further towards the psychological mark of 1.3500.

On the downside, any recovery above the 1.3650 area is likely to attract fresh sellers and remain capped before the 1.3700 round mark. This is followed by the support break point at 1.3725, which if decisively overcome could trigger a short-covering rally. The USD/CAD pair could then climb to the intermediate hurdle of 1.3765-1.3770 and attempt to reclaim the 1.3800 mark. The recovery momentum could extend further towards the 1.3845-1.3850 region en route to the 1.3875-1.3880 region. Some follow-on buying will shift the bias back in favor of bullish traders and push spot prices above the 1.3900 round mark toward the YTD high around the 1.3945 zone reached earlier this month.

USD/CAD daily chart