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Abstract: The preliminary reading for the U.S. July Markit Manufacturing PMI came in at 49, reaching a three-month high. However, the preliminary reading for the July Markit Services PMI hit 52.4, marking a five-month low, and the July Markit Composite PMI reached 52, the lowest level in five months.

Fundamentals

Entering the new week, USDCAD bulls once again disappointed the market. Despite showing signs of bottoming out earlier, the bulls failed to rally again. During a busy week of economic data, investors remained cautious, awaiting the Fed's interest rate decision for fresh impetus in the currency pair.

In the latest released data, the U.S. July Markit Manufacturing PMI came in significantly above market expectations, continuing to support the uptrend in crude oil prices. In turn, this limited the upside potential for USDCAD and boosted the commodity-linked Canadian dollar, which is closely tied to oil prices.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated, "July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence, and sticky inflation."

The overall output growth rate for both manufacturing and services is consistent with an annualized quarterly growth rate of 1.5% for Q3, which is lower than the expected growth rate of 2% revealed in the second-quarter survey.

However, the growth is being entirely driven by the services sector, particularly with expenditure from international clients continuously increasing, offsetting the stagnation in manufacturing and the subdued demand from U.S. households and businesses.

Moreover, business optimism for the year ahead has sharply deteriorated to the lowest level seen this year. The dim outlook adds downside risks to output growth in the coming months, along with the slowdown in expansion pace in July, raising concerns that the U.S. economy could face another slowdown by the end of this year.

Meanwhile, sticky price pressures remain a significant concern. U.S. companies reported further rises in business activity in July, with the services sector continuing to drive economic growth.

Nonetheless, the expansion pace declined to a five-month low as output growth in the services sector slowed, while manufacturers reported production levels remaining broadly unchanged at the start of the third quarter. New orders remained in expansionary territory, albeit at a slower rate. On the price front, upward cost pressures continue to be led by the services sector.

Technical Analysis

From a technical standpoint, USDCAD bulls are holding above the 50-hour and 100-hour Exponential Moving Averages (EMA), indicating a favorable environment for bullish trades.

However, the 1.3290-1.3300 range seems to be a formidable obstacle for USDCAD. Despite this, the Relative Strength Index (RSI) remains above 50 in the bullish zone, suggesting that the bulls might maintain control in the short term. Nevertheless, the currency's minor uptrend has thus far failed to breach the key resistance at 1.3200, leaving uncertainty surrounding the potential for further upside.

On a larger timeframe, the short-term range-bound pattern highlights the significant resistance faced by the asset around 1.3225. The daily and weekly Directional Movement Index (DMI) oscillators continue to be unfavorable for the bulls, helping explain the USDCAD's inability to stage a significant rebound. This further implies that it may soon break below the previous low at 1.3092.

Looking to the downside, any sustained weakness below the 1.3200 level will challenge the next support at 1.3185. A further decline will lead the currency pair to drop towards the previous demand zone at 1.2992 (the low of September 15, 2022).

Trading Recommendations

Trading Direction: Short

Entry Price: 1.3200

Target Price: 1.2992

Stop Loss: 1.3330

Valid Until: 2023-08-07 23:55:00

Support: 1.3121, 1.3092, 1.3064

Resistance: 1.3228, 1.3290, 1.3305