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Canadian Dollar Forecast: USD/CAD Biased Higher on Sour Sentiment, Geopolitical Risks

USD/CAD TECHNICAL OUTLOOK: SLIGHTLY BULLISH

  • The Canadian dollar has failed to capitalize on rising oil prices and Bank of Canada’s hawkish stance due to the military conflict in Eastern Europe and its impact on sentiment
  • Russia-Ukraine crisis dominates trader psychology, driving safe-haven demand and limiting the appeal of riskier currencies
  • USD/CAD will remain biased to the upside if the geopolitical situation continues to worsen. The technical picture is also constructive for the pair

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The ongoing war in Ukraine has dominated traders’ psychology in recent weeks, weighing on sentiment, fueling financial market volatility, and driving oil to its highest level in more than a decade. In theory, the Canadian dollar should benefit from elevated crude prices, given that the commodity is one of Canada’s main exports, but that hasn’t exactly been the case, as extreme investor anxiety has reduced the appeal of high-beta currencies, boosting demand for safe havens. Unsurprisingly, USD/CAD has traded with a slight positive bias over the past month, briefly reaching 1.2868 last week, an area not tested since late December 2021.

The Canadian dollar has also failed to take advantage ofBank of Canada’s hawkish stance. On Wednesday, policymakers raised interest rates by 25 basis points to 0.50% to rein in red-hot inflation, which hit a new 30-year high of 5.1% y/y in January. In addition, the central bank indicated that borrowing costs will need to rise further, noted that there is considerable space left to hike over the course of the year and did not rule out the possibility of a rare 50 basis point adjustment in the future to tame soaring consumer prices.

Under normal circumstances, the hawkish tone adopted by the BoC would have been enough to push USD/CAD lower, but with the Ukraine war on everyone’s mind, this has not happened. In a context of increasing geopolitical risks, the pair is unlikely to decline, on the contrary, it could go higher in the short term on episodes of flight to safety. However, it is important to keep in mind that any de-escalation in the military conflict in Eastern Europe may reverse the situation in the blink of an eye, bolstering the loonie and paving the way for a sharp sell-off in USD/CAD.

From a technical point of view, USD/CAD remains biased to the upside, especially after failing to break below Fibonacci support in the 1.2600 area (38.2% Fibonacci retracement of the June/December rally last year). That said, if price continues on its trek upward, the first resistance to watch out for appears at last week’s high around 1.2878, although a move above this level may set the stage for a retest of the 2021 high in the 1.2964 area.

On the other hand, if USD/CAD pivots to the downside, support is seen near the 1.2600 psychological level and then the 200-day moving average. If both floors are breached, the medium-term rising trendline near 1.2550 will come into play.

USD/CAD TECHNICAL CHART

Canadian Dollar Forecast: USD/CAD Biased Higher on Sour Sentiment, Geopolitical Risks

USD/CAD chart prepared using TradingView

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—Written by Diego Colman, Contributor