The USD to CAD currency pair is flat on the day trading at 1.3773 during Monday’s European session. Traders have been excitedly anticipating Canada’s Consumer Price Index (CPI) data for the month of November. Scheduled for publication at 13:30 GMT, this data could significantly influence the direction of USD/CAD, especially considering the recent performance of the Canadian dollar and ongoing economic indicators.
Recent trading patterns suggest that USD/CAD is now sitting just below a key technical barrier. The 50% retracement level at 1.3838 remains the first target to watch for pair. Analysts suggest that if USD/CAD fails to breach this level, it may lead to further weakness in the currency pair. A technical floor is starting to emerge at the 61.8% Fibonacci retracement level of 1.3770. This level is the main buffer keeping USD/CAD from crashing through its floor.
Technical Analysis and Market Sentiment
Let’s take a look at the technical landscape for USD/CAD to identify some key tell-tale signs. The current trading price is indicative of a bearish bias. This trend is primarily motivated by its location under the bearish 20-day Exponential Moving Average (EMA). This nuance has firmly put a lid on any rebound efforts for USD/CAD.
The 14-day Relative Strength Index (RSI) is at 29, illustrating intense downside momentum. This indicates that market sentiment is in favor of more weakness until a bottoming occurs. If USD/CAD breaks below support at 1.3770, analysts predict a further decline. They are looking for it even to get back to the 78.6% Fibonacci retracement level at 1.3675.
“Current rate is at about the right level to keep inflation close to 2% as long as the economy and inflation evolve in line with projections.” – The Bank of Canada (BoC)
Focus on Core Inflation
The market is still reverberating with excitement over Friday’s strong CPI figure. In the meantime, core inflation has become a central fixation for economists and central bankers. Core inflation is usually targeted at around 2% — a lodestar that many central banks, including the Federal Reserve, use as a guiding star to calibrate their monetary policies. It shows a truer picture of the inflation trends beneath the surface, stripping out volatile items like food and energy.
Economists will be closely eyeing core inflation for signs that it is headed back up above the Fed’s target. When that occurs, central banks understandably feel pressure to raise interest rates. The Bank of Canada has previously indicated that while “underlying inflation is still around 2.5%,” they believe that “CPI inflation will remain close to the 2% target as economic slack roughly offsets cost pressures linked to trade reconfiguration.”
Implications for Monetary Policy
The next CPI release will be crucial for Canada’s monetary policy. This would be particularly the case if core inflation trends were to surprise in the other direction. An even-higher core CPI than expected might leave the Bank of Canada little choice but to raise interest rates at some point. This reaction should result in changing USD/CAD trading dynamics as inflationary pressures pick up.
Market participants are closely watching the CPI print. Specifically, they will drill down into month-on-month (MoM) and year-on-year (YoY) changes to better understand Canada’s prevailing economic conditions. Should the data reflect a consistent upward trend in inflation, it may solidify expectations for tighter monetary policy from the BoC.