USD/CAD Price Forecast: Strengthens above 1.4000, bullish tone prevails above key averages

The USD/CAD pair experienced a gain in strength, reaching approximately 1.4020 during the early European trading hours on Monday. The decline in crude oil prices impacted the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Canada is a significant oil-exporting nation, and low crude oil prices generally have a negative effect on the CAD.

Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee and Bank of Canada (BoC) Governor Tiff Macklem are scheduled to provide insights later on Monday. Scotiabank strategists anticipate that Macklem's remarks might reinforce the hawkish stance adopted following the bank's meeting earlier this month. The BoC had maintained its key policy rate at 2.25% during the September meeting, as expected.

However, it highlighted an increase in inflation risks and expressed uncertainty regarding the growth outlook due to new tariffs. Traders estimate a 60% probability that the BoC will raise rates at its upcoming meeting on October 28. Scotiabank analysts note that the Canadian Dollar continues to lag, with "wider US/Canada front-end spreads" identified as the most significant hindrance to the currency, along with the fact that crude oil prices have declined on that day.

They also caution that, "at the margin, the weaker CAD is detrimental to the BoC's deliberations on inflation risks." Looking ahead, Scotiabank highlights that Governor Macklem will speak in Halifax on Monday, potentially reiterating concerns over growing inflation risks, suggesting that "strengthening expectations of tighter BoC policy before the year-end would provide some support for the CAD."

In the daily chart, USD/CAD displays a bullish short-term outlook as the spot price trades above the 100-day simple moving average (SMA) and is positioned above the upper side of the 20-day Bollinger envelope. The Bollinger middle band further strengthens the trend support, while the Relative Strength Index (RSI) at 63 remains in positive territory, indicating ongoing upside pressure rather than a rapid overbought condition.

The immediate support level is observed at the 1.4000 psychological level, followed by the 100-day SMA at 1.3950. A more substantial decline would expose the 20-day Bollinger middle band near 1.3880, with a more distant safety net at the lower band around 1.3745. On the upside, the immediate resistance level is located at the August 4 high of 1.4080, heading towards the July 28 high of 1.4129.

A successful continuation of buying above this level could potentially lead to the June 24 high of 1.4248. The key factors driving the Canadian Dollar include the level of interest rates set by the Bank of Canada, the price of oil, Canada's largest export, the health of its economy, inflation, and the Trade Balance, which represents the difference between Canada's exports and imports.

Market sentiment, such as whether investors are taking on riskier assets (risk-on) or seeking safe-havens (risk-off), also plays a role, with risk-on often being positive for the CAD. As its main trading partner, the health of the US economy significantly influences the Canadian Dollar. The Bank of Canada influences the Canadian Dollar by adjusting interest rates, which in turn affect interest rates for the wider market.

The Bank of Canada aims to maintain inflation at 1-3% by raising or lowering interest rates. The price of oil, being Canada's largest export, directly impacts the value of the Canadian Dollar. When oil prices rise, the CAD also rises, as aggregate demand for the currency increases. Conversely, a decline in oil prices tends to lower the CAD.

Higher oil prices also increase the likelihood of a positive Trade Balance, which further supports the CAD. Although inflation was historically considered negative for a currency due to its devaluation effect, modern times have shown that higher inflation can lead central banks to raise interest rates, attracting global investors seeking lucrative investment opportunities, thus increasing demand for the local currency, in this case, the Canadian Dollar.

Macroeconomic data releases, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys, also impact the CAD. A strong economy attracts more foreign investment and may prompt the Bank of Canada to raise interest rates, strengthening the CAD. Conversely, weak economic data typically leads to a decline in the value of the CAD.