Canadian Dollar Forecast: USD/CAD Tests Support Ahead of US CPI

Canadian Dollar, USD/CAD Talking Points:

• The USD/CAD breakout pulled back after the NFP report last Friday, finding support on Thursday at the 50% mark of the recent rally.
• That compares with the USD that drove below the 61.8% retracement from the same rally, illustrating a degree of Canadian Dollar weakness that remains attractive for USD bulls as we move into US CPI on Tuesday.

Canadian Dollar Forecast: USD/CAD Pulls Back

USD/CAD finished the month of July with a strong rally as the US Dollar finished its strongest monthly outlay since April of 2022. But the August open brought a far different tune as the NFP report released on the first drove a sizable pullback in the USD, with the currency showing its largest one-day slide in more than three months.

That slide continued through early trade over the past week in both the USD and USD/CAD, although the move was moderated a bit in USD/CAD given the inclusion of some Canadian Dollar weakness. USD/CAD has so far found support at the 50% mark of the late-July rally which is also very nearby the resistance side of the ascending triangle that had previously given way to breakout. This was the spot of support that I was looking for last week, and it’s now in-play as we move towards a critical US CPI report.

USD/CAD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD for USD-Strength

For much of Q2 I was favoring USD/CAD for USD-weakness scenarios. And while that played well for much of the first two months, it was in July when matters began to shift, as USD/CAD began to build higher-lows that eventually culminated with that ascending triangle formation and subsequent breakout in late-July. At this stage, the pair can be attractive for USD-strength given that technical backdrop, that sees price testing support around prior resistance following a fresh two-month high.

And on that front, US CPI is expected to come out to another increase next week, with Core CPI expected to bump up to 3% on an annualized basis as headline CPI rises to 2.8% from last month’s 2.7% print. And for a USD that’s been beaten down with rate cut hopes this brings the very real question as to how the Fed can justify moderating rates even as inflation is already moving higher without any additional accommodation.

This does highlight a conflict between the Fed and what President Trump has wanted with softer rates, but the issue remains that even if the Fed does cut rates, it doesn’t ensure that longer-term rates will move lower. Like we saw last year, long-term rates are decided by market participants, and lower short-term rates could boost longer-term inflation forecasts which, in-turn, could push higher rates. And that’s what would impact mortgage rates in the United States, like we saw last year.

To be sure these are factors likely already under consideration at the FOMC which is why this CPI report next week is so important. Like we saw last month with CPI moving higher, President Trump came out a day later to threaten Jerome Powell’s job, as I had discussed in the webinar the day of that print but before the threat was levied. A three-handle on Core CPI will be difficult for both the Fed and rates markets to ignore and that could moderate rate cut bets and in-turn boost the USD, with USD/CAD looking to be one of the more attractive backdrops for that theme, at the moment.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist