USD/CAD Outlook: Loonie Gains Traction as Oil Rallies

• Oil rose after the US and the UK announced air and sea strikes on Houthi military targets in Yemen.

• US consumer prices rose in December, coming in 0.3% higher for the month.

• Traders estimate a 73.2% likelihood of the Fed initiating its first 25 bps cut in March.

The USD/CAD outlook took a bearish turn on Friday in the wake of a dynamic shift. The Canadian dollar rose with oil prices after the announcement of air and sea strikes by the US and UK on Houthi military targets in Yemen. The strikes were in retaliation for the group’s attacks on ships in the Red Sea.

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Meanwhile, investors continued digesting the US inflation report. It will shape market expectations on Fed rate cuts.

Consumer prices in the US rose in December, coming in 0.3% higher for the month and marking an annual increase of 3.4%. Still, traders estimate a 73.2% likelihood of the Fed starting its first 25 basis point (bps) cut in March. Moreover, they expect additional cuts after that.

However, Fed officials are less optimistic. Austan Goolsbee, President of the Chicago Fed Bank, indicated uncertainty about whether there was enough progress for the Fed to start rate cuts. Moreover, investors had lost confidence in an early rate cut in the previous session.

On Thursday, the Canadian dollar dropped to a four-week low against the stronger US dollar due to the higher-than-anticipated US inflation data. Initially, it raised doubts about the likelihood of an early start to Fed rate cuts.

Tony Valente, a senior FX dealer at AscendantFX, commented: “With little domestic economic news, the CAD responded to the US inflation report.”

USD/CAD key events today

• US Producer Price Index m/m
• US Core Producer Price Index m/m

USD/CAD technical outlook: Bulls ride the channel as the 30-SMA levels out

On the technical side, USD/CAD has remained in its bullish channel as the 30-SMA flattens. The bullish bias remains as the price is making higher highs and lows. Moreover, it is staying mainly above the 30-SMA. However, bullish momentum continues to weaken with each new high as the RSI is descending. 

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Therefore, bears might soon get stronger than bulls, leading to a breakout below the channel support and a reversal in the trend. However, if bulls regain momentum at the channel support, the bullish move might continue higher to the 1.3501 resistance level.

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• Source: https://www.forexcrunch.com/blog/2024/01/12/usd-cad-outlook-loonie-gains-traction-as-oil-rallies/