USD/CAD flashing signs of a trend change

Strait of Hormuz reopening hopes knock crude and USD lower
Weak US income data raises doubts on consumer staying power
USD/CAD reversal signal flashes beneath key 1.3800 level
Momentum rolling over as traders eye downside extension

Softer US data joins Hormuz optimism

Reports the US and Iran may be close to extending their ceasefire agreement helped knock crude prices and big dollar lower overnight. Softer US data provided fuel for the move, with falling real disposable incomes and a continued drawdown in household savings raising fresh doubts whether consumer spending can continue to hold up at current rates. Headline PCE inflation also came in a touch softer than expected.

The softer macro backdrop arrived just as USD/CAD delivered a bearish technical signal from a known resistance zone. A bullish key reversal should have traders on alert for a potential trend change following the bullish move seen in May.

May bullish trend under Threat

Source: TradingView

With the pair now sitting beneath 1.3800, which has provided support and resistance in the recent past, shorts could be established beneath the level with a tight stop above, targeting lower levels. A backtest and rejection at 1.3800 would strengthen the merits of the setup, especially as price action into month-end cannot always be trusted.

The intersection of the 50-day moving average and 50% fib retracement of the April bear move looms as the first target/assessment zone, although the breakout level of 1.3710 screens as a more appropriate target for those unwilling to wait for a potentially better entry level.

Strengthening the signal from Thursday's candle, the oscillators are also rolling over, indicating bullish strength is now retreating, improving the prospects for shorts. RSI (14) has broken its uptrend and is now moving back towards the neutral 50 level. MACD remains positive for now, although the gap between it and the signal line is now narrowing as it rolls over.

Aside from headlines relating to the Strait of Hormuz, the other fundamental risk event traders should be aware of today is Canada's Q1 GDP report. An annualized growth rate of 1.5% is seen, rebounding from the 0.6% contraction seen in Q4 last year.

By and large, Canadian data has been softening recently, often missing on the downside relative to expectations. While another Canadian undershoot would erode the prospects for shorts, the counterview is that even an in-line result, let alone a beat, may spark an asymmetric reaction function with so much pessimism already built in.

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