In the European session on Friday, the USD/CAD pair experienced a correction, retreating close to the 1.3480 level after facing resistance near the psychological barrier of 1.3500. The Loonie’s movement is primarily influenced by the restrained performance of the US Dollar, which, following a robust recovery, has shifted to a sideways trajectory as investors await further guidance on Federal Reserve (Fed) interest rates.
S&P500 futures displayed a lack of momentum during the European session, indicating a subdued market sentiment. Despite Fed policymakers emphasizing the need for additional evidence on inflation declining sustainably to the 2% target, the USD Index hovered around 104.00.
Fed Governor Christopher Waller, on Thursday, highlighted the perceived risks of acting too quickly on rate cuts versus waiting for more robust inflation data. Waller expressed the importance of monitoring data for at least a couple of months to ascertain whether the sticky inflation numbers in January were a singular occurrence or indicative of a slowdown in price pressures.
Notably, the Canadian Dollar failed to capitalize on strong Retail Sales data for December, with monthly growth exceeding expectations at 0.9%. This robust performance, coupled with a stagnant showing in November, has added complexity to the inflation outlook.
Analyzing the USD/CAD on an hourly timeframe, a Head and Shoulder chart pattern has emerged, signaling a prolonged consolidation. A potential bearish reversal is anticipated with a breakdown below the neckline established on February 9 at 1.3413.
Key technical indicators include the 50-period Exponential Moving Average (EMA), acting as a significant barrier for US Dollar bulls. The 14-period Relative Strength Index (RSI) is confined within the 40.00-60.00 range, indicative of a sideways trend.
A potential sell-off scenario may materialize if the Loonie drops below the January 31 low at 1.3359, exposing the asset to the lows of January 4 at 1.3318 and January 5 at 1.3288.
Conversely, an upside breakout could occur if the Loonie surpasses the January 17 high at 1.3542, propelling the asset towards the psychological resistance of 1.3600, followed by the November 30 high at 1.3627.
