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The US dollar has reversed sharply from the 1.2950 level against the Canadian dollar as traders start to factor in that the FED are less likely to announce tapering this week due to the event being held virtually.
Last week the USDCAD pair staged a huge 450-point rally from its opening price as a combination of US dollar strength and big tumble in oil prices caused the Canadian dollar to fall.
Bulls do need to be careful because the USDCAD pair has significantly more scope to correct lower from current levels due to the presence of bearish MACD price divergence down to the 1.2200 level.
In fact, I would not be surprised to see the USDCAD pair giving back all its former weekly gains if we fail to see FED Chair Powell announcing tapering at the “virtual” Jackson Hole meeting this week.
Furthermore, we must consider that oil prices still have a large amount of scope to recover higher after last week’s sell-off, which could be bullish for the Canadian dollar and other commodity-related currencies.
Last week, we saw very high levels of negative sentiment towards the USDCAD pair, with some 78 percent of market participants bearish towards the USDCAD pair. This bearish sentiment bias has changed and is largely.
Now the ActivTrader market sentiment tool shows that 55 percent of traders are bearish towards the USDCAD. This could mean that the short squeeze is over, and we could see further downside in the pair.
USDCAD Short-Term Technical Analysis
The four-hour time frame shows that an inverted head and shoulders pattern has reached its upside target and a series of large bearish reversal candles have formed, proving an ominous sign for the bulls.
It is noteworthy that significant amounts of bearish MACD price divergence have formed during this month’s price rise, and extends towards the 1.2280 support area. Watch out for further losses as the divergence continues to unwind.
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USDCAD Medium-Term Technical Analysis
The USDCAD pair has started to trade back towards its trend defining 200-day moving average. I suspect that we will see a big battle taking place the 200-day MA over the coming days.
The USDCAD pair could have also formed a much large head and shoulders pattern, which will be confirmed if we see a coming decline back towards the 1.2400 support level.
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