USD/CAD Price Analysis: Remains on the defensive below 1.3600, setup favours bullish traders

• USD/CAD oscillates in a narrow band below the 1.3600 mark on Monday.
• The technical setup favours bulls and supports prospects for further gains.
• A convincing break below the 200-day SMA will negate the positive bias.

The USD/CAD pair struggles to capitalize on Friday's solid recovery from levels just below the 1.3500 psychological mark or a two-week low and kicks off the new week on a subdued note. Spot prices remain below the 1.3600 round figure through the Asian session, though the near-term bias seems tilted in favour of bullish traders and suggests that the path of least resistance is to the upside.

Bets that the Federal Reserve (Fed) will leave interest rates unchanged at its September policy meeting, along with a positive risk tone, weigh on the safe-haven US Dollar (USD) and act as a headwind for the USD/CAD pair. Market participants, however, seem convinced that the Fed will keep rates higher for longer and have been pricing in the possibility of one more 25 bps lift-off by the end of this year. This remains supportive of elevated US Treasury bond yields and should help limit the downside for the buck.

Moreover, growing worries about a deeper global economic downturn overshadow the optimism led by more stimulus measures from China and support prospects for a further near-term appreciating move for the Greenback. The Canadian Dollar (CAD), on the other hand, is weighed down by Friday's data, showing the economy contracted during the second quarter. This, along with a modest pullback in Crude Oil prices, could undermine the commodity-linked Loonie and lend support to the USD/CAD pair.

From a technical perspective, the recent breakout through the 200-day Simple Moving Average (SMA) and the emergence of fresh buying on Friday favours bullish traders. Moreover, oscillators on the daily chart are holding comfortably in the positive territory and have also eased a bit from the overbought zone. This further adds credence to the near-term positive outlook for the USD/CAD pair, though it will still be prudent to wait for acceptance above the 1.3600 round-figure mark before positioning for further gains.

The next relevant hurdle is pegged near the 1.3635-1.3640 area, or the multi-month peak touched in August. Some follow-through buying has the potential to lift the USD/CAD pair to the 1.3700 mark en route to the 1.3740-1.3745 resistance zone. The momentum could get extended further towards the 1.3800 round figure, above which spot prices could climb to the YTD peak, around the 1.3860 area touched in March.

On the flip side, any meaningful slide is more likely to find decent support near the 1.3555-1.3550 area. a subsequent slide could be seen as a buying opportunity near the 1.3500 mark and remain limited near the 1.3460-1.3455 region, or the 200-day SMA. The latter should act as a pivotal point, which if broken decisively would shift the bias in favour of bearish traders and make the USD/CAD pair vulnerable. Spot prices might then fall to the 1.3400 mark en route to the next relevant support near the 1.3370 area.

USD/CAD daily chart

Technical levels to watch