Inverse Head and Shoulders Pattern Signals Bullish Reversal

Forex Economic

Summary:

The recent support level at 1.3940, which was also touched on October 8th, forms the shoulders of the pattern.

Buy USDCAD

EXP

Trading

1.39599

ENTRY

1.40600

TGT

1.39000

-- -- --

Point

Flat

1.39000

CLOSING

1.39599

ENTRY

1.40600

TGT

The Canadian Dollar (CAD) is set to be heavily influenced by November labor market data, scheduled for release on Friday. The consensus forecast anticipates the Canadian Unemployment Rate will tick higher, reaching 7.0% from the 6.9% rate recorded in October. Meanwhile, the overall size of the labor force is expected to remain generally stable.

The latest third-quarter Labor Productivity figures offered a slightly favorable signal for the Canadian Dollar earlier this week. Productivity increased by 0.9% quarter-over-quarter (QoQ), significantly improving from the -1.0% contraction in the preceding quarter and comfortably surpassing the 0.4% forecast. Attention is now firmly fixed on Friday's labor market release, which is considered crucial ahead of the Bank of Canada's (BoC) interest rate decision on December 10th.

The latest U.S. economic data presented a conflicting view of the economy's health. The ISM Services PMI edged up to 52.6 in November from 52.4, surpassing the 52.1 expectation and signaling sustained expansion in the service sector. Conversely, the ADP Employment Change report showed a surprising fall of 32,000 in private sector payrolls in November, drastically missing forecasts for a 5,000 increase. The revised October figure was also downgraded to a lower gain of 47,000. These cuts confirm that private businesses shed 32,000 jobs in November, signaling a clear deceleration from the previous month’s gains.

Amidst the softer labor data, political commentary continues to fuel speculation of a rapid rate-cutting cycle. U.S. President Donald Trump stated on Tuesday that he would announce his nominee for the next Fed Chair in early 2026, confirming his statement from Sunday: "I know who I’m going to choose, yes. We will be announcing it." Further adding to the dovish speculation is an unconfirmed report suggesting that former White House Economic Advisor, Kevin Hassett, has emerged as the favored candidate, viewed as an ally who supports the President's call for faster and deeper rate reductions.

Market participants are currently pricing in an approximately 88% probability of a 25 basis point (bp) rate reduction at the Federal Reserve's upcoming meeting, according to the CME FedWatch Tool. Despite the dovish outlook, U.S. Treasury yields remain firm, with the 10-year Treasury yield sitting at 4.086%, while U.S. real yields hold stable at 1.856%. Inverse Head and Shoulders Pattern Signals Bullish Reversal_1

Inverse Head and Shoulders Pattern Signals Bullish Reversal_1

Technical Analysis

The USDCAD pair appears to be charting an Inverse Head and Shoulders (IHS) pattern, a classic bullish reversal formation. The recent support level at 1.3940, which was also touched on October 8th, forms the shoulders of the pattern. The local low of 1.3888, reached on October 29th, constitutes the head. Price action has already reacted strongly upward upon reaching this level. If this pattern confirms, we could anticipate a bullish recovery targeting the 1.4063 resistance zone, which represents the most significant short-term hurdle.

Further supporting the bullish case, the Relative Strength Index (RSI) reached the 26 level, entering clear oversold territory. This extreme reading is likely to attract buyers to initiate long positions from this zone. The 100-period and 200-period Moving Averages (MAs) are closely aligned at 1.4032 and 1.4027, respectively. Their proximity to the local resistance suggests they will act as a price magnet toward those levels during a recovery. Conversely, a strong downward break below the pattern's neckline would invalidate the IHS setup and open the path for a more pronounced decline.

Trading Recommendations

Trading direction: Buy

Entry price: 1.3960

Target price: 1.4060

Stop loss: 1.3900

Validity: Dec 12, 2025 15:00:00

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