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Summary: USDCAD accelerated higher after breaking above its major bearish trend line near 1.3505. Earlier on Thursday, bulls continued to move higher amid widespread USD strength, hitting the 1.3600 handle at the highest level in three weeks. We believe that the USD will not stop rising because the market's current negotiations around the U.S. debt ceiling will continue to push up risk aversion.

Fundamentals

Safe-haven assets continue to rise after Wall Street was hit by rising risks of debt default and concerns that inflation may not allow the Fed to pause its tightening cycle. The market's current use of the U.S. dollar as a safe haven remains very effective.

House Speaker Kevin McCarthy did not offer any optimism to Wall Street that a deal was imminent. McCarthy said they still have a lot of areas of great disagreement on the debt negotiations and remain at odds with the White House on spending issues.

This is because debt ceiling negotiations remain at an impasse. Short-term Treasuries are in focus as Treasury bills due June 1 spike more than 7.0%.

The FOMC minutes show that officials are divided on continuing to raise rates, and that they will continue to rely on data. A rate cut is unlikely, but policymakers do not appear to be taking any significant stance until the debt ceiling is raised. If inflation ends up being more sticky than economists expect, the Fed will likely skip the June rate hike, but go ahead and raise rates at the July meeting.

Christopher Waller, a voting member of the Fed, said fighting inflation remains a top priority and he does not support stopping rate hikes unless there is clear evidence that inflation is moving lower toward the target.

May's inflation data could show on a monthly basis that inflation is stubborn here. A stronger U.S. dollar and negative risk sentiment have been supporting the pair lately, but it was only yesterday that we really saw a move with a good upside. For USDCAD, however, further gains are expected as the pair breaks above its 100- and 200-day SMAs.

Technical Analysis

Despite the favorable impact of more resilient oil prices on the CAD, the USD and risk sentiment still remain the two main drivers for the bulls in the current market. Given yesterday's technical breakout, it continues to suggest that the latter two will remain the two more important factors driving price action at this time.

USDCAD's rally yesterday broke through key trendline resistance from the March and April highs, and the pair is now challenging the 1.3700 handle. If technical developments remain unchanged, bulls are expected to retest the March supply zone at the 1.3743 level next.

From the 4-hour chart, the pair closed close to the 1.3600 level, well above the 100 SMA and 200 SMA. At the same time, the price broke the main bearish trend line with resistance around 1.3645.

In the short term, the pair has even climbed above the 76.4% Fibonacci retracement of the downtrend from the 1.3667 high to the 1.3315 low. The next major resistance level is around 1.3650 and a break above it could lead to the 1.3700 level. Any further bullish momentum could push the pair toward the 1.3743 level.

On the downside, the pair will find support around 1.3535. The next major support level is at 1.3500 and around the 100-day SMA. If it breaks below the 1.3500 level, the pair could fall toward the support of 1.3440. The next major support is located in the 1.3400 range.

Overall, after the formation of a double bottom in the previous period, in the short term, the two key levels of 1.3629 and 1.3700 will be the primary targets for the bulls to conquer. It's recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3600

Target Price: 1.3800

Stop Loss: 1.3380

Valid Until: 2022-06-08 23:55:00

Support: 1.3600, 1.3512, 1.3453

Resistance: 1.3667, 1.3700, 1.3745