USD/CAD rises to its highest level since April above 1.3650

• USD/CAD rally to breach a four-month high, supported by a combination of factors.
• The pullback in crude oil prices weighs on the CAD and benefits the pair’s rise amid a bullish USD.
• Technical buying above the 1.3600 level also contributes to the strong positive momentum.

USD/CAD moves firmly higher on Tuesday and jumps to its highest level since April 28 during the European session. The pair is trading just above 1.3650, up more than 0.50% on the day, and looks set to continue the bullish trajectory of the past month.

Crude oil prices pull back from yearly high, weighing on commodity price-linked CAD, coupled with new buying around the US dollar (USD), providing a nice boost to the USD/CAD pair. Weak Chinese data reignited concerns that worsening conditions in the world’s second-largest economy would dent fuel demand. This dwarfs expectations that OPEC+ will extend production cuts until the end of the year and weighs on the price of black gold.

Meanwhile, China’s slowness to implement more stimulus measures tempers investor appetite for riskier assets, evidenced by the prevailing caution in stock markets. On top of this, expectations that the Federal Reserve (Fed) will keep interest rates higher for longer, bolstered by a further rise in US Treasury yields, are acting as a tailwind for the dollar as a safe haven and contribute to the strong rise in the USD/CAD pair.

Despite signs of easing in the US labor market, markets continue to price in the possibility of a further 25 basis point rate hike by the Fed by the end of the year. These expectations increased after the publication of inflation data from South Korea, Thailand and the Philippines, which were more bullish than expected. This, in turn, drives the DXY Dollar Index, which measures the strength of the Dollar against a basket of major currencies, to more than three-month highs and favors USD/CAD bulls.

Even from a technical perspective, acceptance above the 1.3600 level and subsequent strength beyond the 1.3635-1.3640 hurdle validate the short-term positive outlook. That being said, the Relative Strength Index (RSI) is showing overbought conditions on the hourly charts and warrants some caution before opening new bullish positions. However, the aforementioned fundamental background suggests that the path of least resistance for the USD/CAD pair is to the upside.

USD/CAD technical levels to watch