Canadian dollar forecast: USD/CAD and EUR/CAD – Technical Tuesday

Tariffs remain the hot topic in the markets. A last minute decision to postpone 25% tariffs on Canada and Mexico by Trump following discussions with the leaders of countries, sent risk assets higher and relieved pressure on the Canadian dollar and Mexican peso on Monday. However, a 10% tariff on China took effect today, with Beijing retaliating with new tariffs of its own on selected US imports. Therefore, the threat of a trade war between the world's largest economies remains, even if deals with America’s neighbouring countries suggest Trump is willing to negotiate on making deals that work for all parties. However, striking deals with China and the eurozone might be a lot more complicated and will take longer than it did in the case of Canada and Mexico. After all, for those countries it was just a matter of border security that was the main issue. For China and the Eurozone, it is a lot more than that. Therefore, markets may remain in a cautious mode for a while yet. For FX, this means that pairs like the EUR/CAD may ease back further following yesterday’ decision by Trump to delay the tariffs on Canada. That decision means the near-term Canadian dollar forecast is no longer bearish, making the EUR/CAD an ideal pair to look for bearish setups on for CAD bulls. Meanwhile, USD/CAD is beginning to look rather interesting, though a further bout of bearish price action would be required to firmly shift momentum in favour of the bears in the near term.

Canadian dollar forecast: EUR/CAD could come under pressure

Considering the fallout from Trump’s handling of the tariff threat against Mexico and Canada, sentiment in the eurozone has seen a lift, driven by hopes that a deal can be reached, and outright protectionism avoided. That said, caution remains the order of the day. While Trump’s decision to hold off on tariffs against the US’s immediate neighbours was partly influenced by border security, the same logic doesn’t apply to the EU. On this front, he has the luxury of playing the long game, leaving tariffs in place for an extended period to exert maximum pressure before coming to the table. Unlike Canada and Mexico, tariffs on the EU would be rooted in trade imbalances, typically requiring lengthier negotiations. 

Against this backdrop, a sustained euro rally seems far from certain. Trump has already signalled that the EU could be next in line for trade action, and investors may see better opportunities in currencies that have already weathered the worst of protectionist pressures, unlike the euro, which may still have the toughest battles ahead. This makes the EUR/CAD a firm favourite for the CAD bulls.

EUR/CAD key levels to watch

The EUR/CAD formed a bearish outside candle on Monday to close well below the key 1.50 handle, before ending the session at just above the 200-day moving average near the 1.49 handle. Given the breakdown of 1.5000 support, the short-term path of least resistance on this pair is now to the downside. If rates now move and hold below Monday’s low of 1.4885, then that could potentially pave the way for follow-up technical selling towards 1.4800 next. The subsequent downside target would be the January low at 1.4685. That said, we now need to see quick downside follow-through. If that doesn’t happen, then the bears may wish to proceed with a bit of care. All bearish bets would be off should the EUR/CAD close back above the broken 1.50 handle now.

Meanwhile, the USD/CAD pair is also starting to look interesting – although some further bearish price action is needed to tilt the balance in the bears’ favour in the near-term.

USD/CAD technical analysis and levels to watch

The USD/CAD initially rallied on Monday to break above both the March 2020 high of 1.4668 and the January peak of 1.4690, rising to a session high of 1.4793, before slumping on the back of news of tariffs being delayed. The resulting price action was a long-legged inverted hammer candle, which is typically found at the top of major swing points. However, similar candle patterns have recently been created but there haven’t been much downside follow-through. Therefore, the bears may wish to see some real downside follow-through now to convince them that at least a near-term peak may have been formed on this pair.

Indeed, the USD/CAD has not yet broken the key 1.4400 support area yet, despite that sharp reversal. Here, prior resistance meets the 21-day exponential average and a rising trend line. A decisive close below this level should therefore pave the way for fresh technical selling that may see rates go on to break below the recent low of 1.4261.

Meanwhile, resistance is now seen around 1.4500, which was already tested earlier in the session, and it held – for now. Above this level, the area between the highs of 2020 and 2016 i.e., 1.4668-1.4690 range marks the next key resistance zone to watch.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the company you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade