July 4 (Reuters) - The Canadian dollar, or loonie, which is riding a five-month rally against the U.S. dollar and kicked off July strongly, is now poised for a significant technical break that could cement its uptrend.

The U.S. July 4 holiday and thin market conditions could see USD/CAD whipped around during Friday's session but, barring a major shock, the pair is set for back-to-back bearish weeks.

The 100-week moving average (1.3780) has capped USD/CAD since its late-May breakdown, acting as pivotal resistance. However, the more significant technical focus this month is the 200-week average (1.3434).

This level has consistently supported the market since September 2022 and represents a viable target for short positions. A breach of the 200-week average could bring the significant 1.3177 low from December 2023 into play.

After peaking at 1.4792 in February, USD/CAD has fallen sharply but isn't yet oversold on the monthly chart. While the speed and magnitude of this decline present a risk of correction, the long-term outlook continues to favour the loonie.

The Canadian dollar's bullish path through July is likely to be underpinned by a broadly weaker U.S. dollar, the prevailing interest rate outlook, and potential for increased hedging from Canadian pension funds.
USD/CAD weekly candle chart:

(Peter Stoneham is a Reuters market analyst. The views expressed are his own)