Canadian Dollar gains ground with inflation data set to test BoC outlook

USD/CAD trades around 1.3860 on Monday at the time of writing, down 0.11% on the day. The pair extends its decline as the US Dollar (USD) remains under pressure against the Canadian Dollar (CAD), with investors scaling back expectations of further monetary tightening by the Federal Reserve (Fed). Attention now turns to Canada’s July inflation data, due later on Monday.

The recent weakening of the US Dollar follows a series of disappointing US economic releases, including an unexpected decline in Retail Sales. Signs of slowing economic activity and softer underlying inflation are reducing the likelihood of an imminent Fed rate hike. According to the CME FedWatch tool, markets now price in around a 30% chance of a rate increase at the next meeting, down from nearly 40% a week earlier.

On the Canadian side, investors await the release of the July Consumer Price Index (CPI). Headline inflation is expected to rise 2.9% YoY, following a 2.8% increase in June, while prices are forecast to advance 0.7% on a monthly basis.

An acceleration in price pressures could reinforce the Bank of Canada’s (BoC) wait-and-see approach. At its July meeting, the central bank kept its policy rate unchanged at 2.25% for the sixth consecutive meeting. BoC Governor Tiff Macklem said the central bank could look through short-term energy shocks while stressing that it would not allow higher energy prices to translate into persistent inflation.

Canada CPI in focus as USD/CAD tests 200-day support and BoC core gauges stay subdued

Strategists at Brown Brothers Harriman note that "USD/CAD is eyeing key support at the 200-day moving average (1.3849)" ahead of the Canada July CPI release at "1:30pm London, 8:30am New York." BBH expects "headline CPI is seen at 2.9% y/y vs. 2.8% in June (BoC Q3 forecast: 2.5%), core CPI (ex. food & energy) is expected at 1.8% y/y vs. 1.8% in June, and core CPI (average of trim and median) is projected at 1.85% for a second straight month (BoC Q3 forecast: 2.0%)." They argue that "Canada’s favorable growth-inflation mix bodes well for CAD. However, the negative output gap leaves room for markets to trim BoC rate hike bets (67bps in the next twelve months), limiting CAD upside."

According to TD Securities, the inflation data should show only a modest firming, as they "look for headline CPI to firm by 0.1pp to 2.9% y/y in July as prices rise by 0.4% m/m on positive contributions from food and energy products, as travel services provide an offset." TD adds that "CPI-trim/median are forecast to hold stable at 1.85% y/y which would leave core CPI tracking below BoC projections from the July MPR and allow the Bank to keep looking through higher oil prices in September." On activity, TD highlights that "manufacturing sales rose by 0.1% m/m in June, just above the market consensus for -0.1% (TD: -0.4%) despite the large drag from lower energy prices," and that "excluding refineries, manufacturing sales rose by 2.6% m/m on broad strength with growth across 15 of 21 subindustries."

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.3860, maintaining a bearish near-term bias as it holds beneath a descending trend-line resistance around 1.3913 and the 100-hour simple moving average (SMA) at 1.3915. The pair also trades well below the 200-hour SMA at 1.3955, reinforcing a capped tone, while the Relative Strength Index (RSI) hovers just above oversold territory near 31, hinting that downside pressure persists but is becoming stretched.

On the topside, initial resistance is located at the downtrend line near 1.3913, closely followed by the 100-hour SMA at 1.3915, forming a nearby supply cluster; a sustained break above this band would expose the higher barrier at the 200-hour SMA around 1.3955. In the absence of clearly defined support levels from the current dataset, the recent lows just under the market remain the nearest reference on the downside, and the bearish outlook is likely to prevail while price trades below the 1.39 area and the cited moving averages.

(The technical analysis of this story was written with the help of an AI tool. Know more.)