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Summary: On Monday, USDCAD reversed its intraday losses and climbed to the top of its daily trading range in the first half of the European session. However, the pair remains confined to Friday's broader downtrend range, below its technically important 200-day SMA, which currently sits around the 1.3365-1.3390 range.

Fundamentals

In the Asian session on Monday, the USDCAD moved higher after oscillating around 1.3360. USDCAD (downward momentum) took a breather as the bearish momentum seems to be exhausted after the U.S. Dollar Index fell to the key resistance at 101.80. In addition, oil prices are range-bound, which is keeping the Canadian dollar stagnant.

The S&P 500 futures made some gains and managed to hold during the Asian session, depicting a return of risk appetite. In addition, the U.S. stock market showed specific sticky moves during earnings season. Despite the weaker-than-expected U.S. retail sales data for March, the likelihood of back-to-back Fed rate hikes of 25 basis points remained solid.

The undeniable fact that slowing growth in U.S. labor market conditions, weak Consumer Price Index (CPI) and Producer Price Index (PPI) reports, and weak retail demand all point to the need for the Fed to suspend tightening as soon as possible.

Fed Governor Christopher Waller said Friday that despite a year of sharp rate hikes, the Fed "has not made much progress" in returning inflation to its 2% target, so further increases in interest rates are needed. He further added that the work on inflation remains "unfinished" because inflation is still "much too high".

For Canada, investors are now focusing on Tuesday's release of Canadian inflation data for March, which will provide guidance for the Bank of Canada's monetary policy actions. As expected, headline inflation is expected to slow sharply to 4.3% from the previously released 5.2%. However, the monthly headline figure is expected to increase by 0.6%, compared to the previously expected 0.4% increase.

Core CPI, which excludes food and energy prices, will fall to 4.2%, compared to the previous release's estimate of 4.7%. This could allow the Bank of Canada to continue its unchanged policy stance. Continued weakness in Canadian inflation has been supporting the Bank of Canada's neutrality on interest rates.

Technical Analysis

USDCAD fell sharply from last week's level of 1.3860, bottoming out at 1.3301, forming a temporary low. The initial phase of last week's decline was neutral and also seen as the third leg of a correction pattern since the start of the 1.3976 level. If it falls again, the momentum is supposed to be controlled by support in the 1.3220 area.

The USD, on the other hand, started the new week on a bullish note after strong gains against major rival currencies by the end of last week. This is expected to help the CAD assets rally further higher. Breaking through 1.3552 should turn back to the upside for a stronger rally.

With the short-covering effect following the sharp price decline, it is expected that prices may return to the 1.3552 level, the mid-point of the sharp decline from the 1.3860 level. Or higher, testing the 1.3600 level. In terms of trading, buying the dips is recommended.  

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3300

Target Price: 1.3600

Stop Loss: 1.3200

Valid Until: 2022-05-01 23:55:00

Support: 1.3301, 1.3262, 1.3225

Resistance: 1.3400, 1.3446, 1.3552