USD/CAD Analysis: The Canadian Dollar Holds Neutrality After CPI Release

USD/CAD has maintained a strong downward trend in recent sessions, falling by more than 1% over the last five trading days, as the Canadian dollar continues to gain ground. However, following the release of recent inflation (CPI) data in Canada, the pair has started to show signs of neutrality. This is because the published data could begin to significantly influence the Bank of Canada's (BoC) decisions in the short term, which in turn would impact the movements of the Canadian dollar.

The Impact of CPI

Yesterday, Canada’s annual Consumer Price Index (CPI) data was released. Initially, the headline CPI came in at 1.9%, in line with forecasts and slightly above the 1.8% recorded in the previous report.

However, the data that raised greater concern was the Core CPI, which excludes volatile components such as food and energy. It stood at 2.1%, significantly higher than the 1.8% reported previously.

Source: Data – FxStreet

The increase in consumer prices was mainly driven by rising energy costs, with gasoline increasing by 8.6% and natural gas by 4.8% compared to the previous month. This has had a direct impact on monetary policy expectations in Canada, reducing the probability of a 25-basis point rate cut by the Bank of Canada in its next meeting to below 30%.

Until recently, the Bank of Canada had maintained a dovish stance, intending to further lower its interest rate from the current 3.0%, following the 25-basis point cut made in its January 29 decision. However, the latest inflation data could dramatically alter this outlook, leading the central bank to adopt a more aggressive approach, keeping rates at 3.0% to curb inflation.

If this new stance begins to consolidate in the market, the Canadian dollar could experience upward pressure against the U.S. dollar, as the market adjusts to a monetary policy shift by the Bank of Canada, a stance not seen in months.

What About the Central Banks?

Despite the recent inflation data bolstering the Canadian dollar, high U.S. interest rates continue to pose a challenge to the demand for fixed-income assets in Canada. Currently, the U.S. maintains its interest rate at 4.5%, while Canada's rate stands at 3%.

Interest Rate Trends: U.S. vs. Canada

Source: Tradingeconomics

Since September 2024, both central banks have followed a downward trend in their monetary policy decisions. However, with increasing inflation concerns, the market expects the Fed to maintain higher interest rates than the Bank of Canada in the short term.

This rate differential could play a key role in the direction of USD/CAD. If investors perceive that U.S. Treasury bonds offer better returns than Canadian securities, demand for the Canadian dollar could weaken, creating a bearish bias in its valuation.

USD/CAD Technical Forecast

Source: StoneX, Tradingview

• New Downward Channel Formation: The continued weakness of the U.S. dollar has allowed the Canadian dollar to sustain a downward trend in USD/CAD. Currently, three lower highs have been identified on the chart: Late January, February 12 and current level.

   

  The connection of these three points suggests the possible formation of a new short-term bearish channel. However, for this pattern to fully consolidate, the price must maintain selling pressure as it approaches the next key support level, which will determine the significance of this new bearish structure.

   

• MACD: Currently, both the MACD lines and its histogram remain below the neutral level (0), indicating that the moving average trend remains predominantly bearish. If the histogram continues to move further away from the neutral level, selling pressure could intensify in the short term.

   

• RSI: The RSI is showing a similar pattern, fluctuating below the 50 level, confirming the prevailing bearish trend over the past 14 sessions. As long as the RSI line does not approach oversold levels (around 30), it is unlikely that strong bullish corrections will occur in the upcoming sessions.

   

  Key Levels:

   

• 1.41129: Critical support. This level corresponds to a neutral price zone recorded in early December 2024 and aligns with the 100-period simple moving average. If selling pressure is strong enough to break this level, the bearish channel could consolidate further, reinforcing the downward trend in the following sessions.

   

• 1.43202: Key resistance. This level coincides with the lower boundary of a previous sideways range and with the 50-period moving average. A rebound to this level could jeopardize the bearish structure and open the door for a bullish reversal.

   

• 1.44469: Major resistance. This represents the highest-level USD/CAD has reached in recent months. A rally back to this area could reactivate a larger bullish trend, nullifying the recent weakness of the U.S. dollar.

Written by Julian Pineda, CFA – Market Analyst