Technical Sentiment: Bearish

Key Takeaways

• Durable Goods Orders m/m spiked to 22.6%; however markets reacted only to Core Durable Goods Orders which showed a disappointing -0.8% decline;
• CB Consumer Confidence rose again, this time to 92.4; with muted market reactions due to USD being extremely overbought.

USD/CAD faked a break above 1.0985 early in the Asian session and was quickly sold off afterwards. Conditions seem ripe for a deeper correction which will allow the pair to shed current overbought conditions.

Technical Analysis

We’re seeing the fourth USD/CAD swing high revert in the 1.0985 region, all during the month of August, with the latest one appearing to form the most decisive reversal so far. Overbought conditions are clearly weighing in hard on USD, considering a case could have been made for an extended bullish run over 1.1000 based on today’s US data. Overall market sentiment apparently disagrees; hence sellers took control while bulls will watch from the sidelines until Thursday, when US Preliminary GDP, Unemployment Claims and Pending Homes Sales might ignite a comeback for the greenback.

Halfway into the US session on Tuesday, USD/CAD is trading around 1.0945, forming a Bearish Engulfing price action pattern on the Daily timeframe. Stochastic remains near overbought territory on the larger timeframes, but we can observe a tendency to decline as sellers gain more traction.

1.0925/30 will be a critical support area in the immediate hours and trading sessions. Most recent Higher Low is located in this area, together with the 50 and 100 Simple Moving Averages on the 4H timeframe. USD/CAD must break below this cluster to extend the correction towards 1.0850/55. If bears fail to do so, price action will become very choppy between 1.0925 and 1.1000, and the preferred trading strategy will be to trade breakouts outside these boundaries.

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Prepared by Alex Z., Chief Currency Strategist at Capital Trust Markets