USD/CAD hinges on US inflation data as Fed weighs path

USD/CAD OUTLOOK: SLIGHTLY BULLISH

  • USD/CAD has been trending higher in recent weekss despite the moderate decline in recent days and off to the weekend
  • Broad-based strength in the U.S. dollar and weakness in the oil market have been two downside catalysts for the Canadian dollar since the start of August
  • The August US inflation report will be a key volatility driver for the forex market next week

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Most read: US Dollar Price Action Setups – EUR/USD, GBP/USD, USD/CAD and USD/JPY

USD/CAD has been rising since last month, mainly supported by generalized strength of the US dollar. Oil weakness, one of Canada’s main export products, may have reinforced these bullish movements, weighing on the country’s terms of trade. In recent days, however, the exchange rate has retraced some of that advance to trade a little below 1.3050 heading into the weekend, but is still up more than 1.5% overall. since August.

While past performance can give traders important insight into trends and sentiment from time to time, it cannot reliably predict the future. This begs the question: where could the USD/CAD head in the near term based on the latest developments on the economy and monetary policy front?

Over the next few sessions, USD/CAD is expected to follow the general trend of the US dollarwhich means the evolution of the Canadian economy, while remaining relevant in the grand scheme of things, can temporarily fade into the background. That said, next week will bring major economic reports from the US that could set the tone for financial markets, the most important being new CPI numbers due out on Tuesday.




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Traders will be watching the data closely to predict how the Federal Reserve might react to incoming macro information. Focus on consumer prices, Headline inflation in August is seen stagnating on a seasonally adjusted basis (0.0% m/m), a result that could lift the annual rate to 8.1% from 8.5% in July. Meanwhile, core CPI is expected to come in at 0.3% m/m and 6.0% y/y.

For the US Dollar to take a significant hit, we would need a significant directional improvement in inflation readings. An online impression or a modest decline may not be sufficient for change the Fed’s hike plans or weaken its “higher for longer” resolve in interest rate terms, a situation that will likely support US Treasury yields or, at the very least, prevent them from correcting lower.

On the other hand, if the CPI surprises significantly on the downside, with price pressures easing across most components beyond energy, traders could start discounting a lesser tightening cycle. deep, slowly resuscitating the “dovish pivot” theory for 2023. This scenario could weaken the greenback given its overbought conditionpaving the way for a sharp decline in USD/CAD, especially if market sentiment also improves in response to the data.

USD/CAD DAILY CHART

USD/CAD chart prepared using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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