Canadian Dollar Outlook: USD/CAD in Freefall after Double Top Confirmation Signal

2023-06-21 19:20:00

Diego Colman, Contributing Strategist

USD/CAD extends its recent sell-off, falling to its lowest level since September of 2022
Bearish double top target at 1.2990 remains in place for now
Near-term market direction will depend on how prices react near trendline support at 1.3150

Change in	Longs	Shorts	OI
Daily	2%	11%	7%
Weekly	-1%	2%	1%

What does it mean for price action?

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USD/CAD broke below the 1.3300 level decisively last Thursday, confirming a double top pattern, a technical setup with negative implications for the underlying asset once validated. Immediately following the breakdown, the pair plunged into freefall, pausing briefly earlier this week, but continuing its descent today, with the exchange rate currently sitting at its lowest point since September 2022.

After the latest pullback, USD/CAD is probing a dynamic support zone near 1.3150 created by an ascending trend line extended from last year's April lows. For guidance about the near-term outlook, traders should closely watch how prices react around current levels in the coming sessions, but there are two possible scenarios worth highlighting.

Scenario 1: Breakdown

If USD/CAD breaches trendline support at 1.3150 in a clean and clear break on daily closing basis, sellers are likely to take undisputable control of the market, setting the stage for the next leg lower of the double top bearish projection (see chart). This could imply a move toward 1.3080 ahead of a possible retest of 1.2990, the 50% Fibonacci retracement of the June 2021/October 2022 rally.

Scenario 2: Rejection

If bulls fend off the current bearish assault and spark a market turnaround, initial resistance appears at 1.3270. If this barrier is taken out, buyers may regain the upper hand, paving the way for a climb toward 1.3300. Further gains may be in store for USD/CAD on a push above the 1.3300 handle, with bulls possibly eyeing the 50-day simple moving average near 1.3450 in the event of a breakout.