Canadian Dollar remains on the front foot vs soft USD; lacks bullish conviction

The USD/CAD pair pulls back from an over two-week high, around the 1.3910-1.3915 region, earlier this Monday, stalling the recent goodish recovery from a three-month low. Spot prices, however, lack follow-through selling and trade just below the 1.3900 mark during the early European session.

A further escalation of tensions between the US and Iran triggers a fresh leg up in crude oil prices, underpinning the commodity-linked Loonie. The US Dollar (USD), on the other hand, attracts some sellers and erodes a part of Friday's strong move up to a two-week high. These turn out to be key factors acting as a headwind for the USD/CAD pair. However, reviving bets for a rate hike by the US Federal Reserve (Fed), along with geopolitical uncertainties, should help limit losses for the safe-haven USD and the currency pair.

In the latest developments surrounding the Middle East crisis, US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday. This, in turn, prompted Iran to retaliate by launching ballistic missiles on two US bases in Jordan. Moreover, US Treasury Secretary Scott Bessent said that new secondary sanctions were likely to be unveiled weekly in the effort to pressure Iran.

Meanwhile, Fed Chair Kevin Warsh, speaking at the central bank's annual symposium in Jackson Hole, hinted that interest rates could need to move higher if more progress isn’t made on easing price pressures. This comes on top of inflation risks stemming from rising energy prices and lifts market bets that the US central bank will raise borrowing costs in September, which, in turn, favors USD bulls.

Apart from this, the deepening US-Canada trade war could limit any meaningful appreciation for the Canadian Dollar (CAD), warranting some caution before placing aggressive bearish bets on the USD/CAD pair. Traders might also opt to wait on the sidelines ahead of the Bank of Canada (BoC) rate decision on Wednesday and the crucial monthly jobs report from the US and Canada on Friday.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair keeps a bearish near-term tone beneath the 100-day Simple Moving Average (SMA) at 1.3917 and the 38.2% Fibonacci retracement at 1.3922. On the downside, initial support is seen at the 23.6% Fibo. retracement at 1.3847, ahead of the structural floor anchored at 1.3727. On the topside, immediate resistance comes at the 100-day SMA at 1.3917, followed by the 38.2% retracement at 1.3922, with stronger barriers aligning at 1.3982, 1.4043 and 1.4129 before the cycle high near 1.4238.