USD/CAD Analysis: Canadian dollar rebounds after CPI and BoC decision

Over the last two trading sessions, one of the factors gaining short-term relevance has been the renewed strength of the Canadian dollar. This has been reflected in recent USD/CAD price action, with the pair down around -0.18% over the past two sessions.

This mild selling pressure continued after the release of US CPI inflation data, which came in line with market expectations. For now, the data has allowed the Canadian dollar to recover some ground, although rather than showing a strong and consistent bearish move, USD/CAD is starting to reflect a phase of indecision that could remain important over the coming trading sessions.

 

US CPI report takes the spotlight

During the session, the United States released its CPI inflation data. The official reading came in at 4.2%, exactly in line with market expectations. Although this marks an acceleration from the previous 3.8% reading, markets appear to have found some relief for now, as the data did not exceed what had already been expected in previous weeks.

Still, inflation remains an important risk to monitor. In the short term, however, the report has not been strong enough to revive expectations of a more aggressive Federal Reserve over the coming months.

Source: FXSTREET

This is also reflected in the probability table for upcoming monetary policy decisions, where there has been no major change in expectations for a potential US rate hike in December. For the December 9 meeting, markets are currently pricing in a 42.67% probability of a 0.25% rate increase. By comparison, the previous session showed a probability near 43.33%, suggesting that the CPI release did not meaningfully change the market’s outlook.

Source: CMEGROUP

There has also been no major reaction in the US 10-year Treasury yield after the release of the data. The yield remains relatively stable, slightly above 4.5% in the short term. Although this is still higher than the Canadian 10-year yield, which is near 3.5%, the lack of a stronger move during the session has not been enough to maintain sustained demand for the US dollar.

Source: TradingEconomics

Overall, US CPI did not surprise the market and has created a mild sense of relief around the possibility of a more aggressive Federal Reserve. This has been reflected in a more neutral tone for the USD, allowing the CAD to recover moderately. This backdrop could continue to favor a phase of indecision in USD/CAD over the coming sessions, at least until markets receive more relevant updates from the Federal Reserve on the policy path the central bank may follow.

 

What happened with the Bank of Canada decision?

During the session, the Bank of Canada also announced its interest rate decision, keeping the rate unchanged at 2.25%. The bank noted that, for now, there is limited evidence that higher energy prices are spreading broadly into other goods and services. In addition, inflation does not yet represent a fully active threat, as the latest April reading showed an average annual inflation rate of 2.8%, slightly below the central bank’s upper target limit near 3.00%.

Source: TradingEconomics

This event has not been entirely favorable for a more consistent strengthening of the Canadian dollar, as the Bank of Canada is still perceived as very cautious in the short term. There is also uncertainty over when it could begin raising interest rates again, since the tone of its decisions does not point to any meaningful aggressiveness from the central bank.

For this reason, the CAD’s current mild strength is likely more related to short-term USD weakness than to a direct boost from the Bank of Canada’s decision.

Against this backdrop, the pause narrative remains important. If future inflation data in Canada, or comments from the central bank, suggest that inflation is becoming a more relevant problem, markets could begin to price in a somewhat more aggressive BoC. In that scenario, Canadian dollar-denominated investments could become more attractive in the short term and increase the possibility of more consistent selling pressure in USD/CAD over the medium term.

 

Technical outlook for USD/CAD

Source: StoneX, Tradingview

• A new sideways range begins to gain relevance: Constant USD/CAD movements over the past few weeks have started to reflect a relevant short-term sideways range, marked by an upper boundary near 1.39215 and a lower area close to 1.35422. So far, the limits of this range have managed to contain price action partially. For this reason, as long as the upper boundary continues to act as relevant resistance, sideways movement could remain important over the coming trading sessions.
   
• RSI: Although RSI continues to hold consistently above the 50 level, showing that the average bullish momentum remains dominant in the short term, the indicator is still relatively close to the overbought area marked by the 70 level. This suggests that there may have been excess buying strength in previous sessions, which could still leave room for possible bearish corrections in the coming sessions.
   
• MACD: In the MACD, the histogram has started to flatten in the short term, suggesting that the bullish impulse from the moving average structure has started to lose traction. This may reflect a pause in current buying strength, a dynamic that could remain relevant over the following sessions.
   

Key levels:

• 1.39394 – Relevant resistance: Important high located above the 50- and 200-period moving averages, also aligned with the upper area of the sideways range seen over the past few months. Consistent moves above this level could trigger a breakout of the broad sideways range and open the door to a more structured bullish trendline over the coming weeks.
   
• 1.38201 – Near-term barrier: Neutral zone that coincides with the 200-period simple moving average. Price action near this level could continue to highlight a phase of indecision and keep the sideways range as the dominant pattern on the chart over the following sessions.
   
• 1.37032 – Crucial support: Nearby support that coincides with one of the most relevant pullback areas of the last few trading weeks and stands as the main bearish barrier below the moving averages. Price action moving back toward this level could begin to highlight a relevant selling bias, which may gain importance over the coming weeks.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25