USD/CAD refreshes four-year high near 1.4200 with US inflation, BoC policy in focus

USD/CAD rises to a fresh four-year high near 1.4200 ahead of BoC monetary policy announcement and the US inflation.
US core CPI is estimated to have grown steadily by 3.3% in November.
Investors expect the BoC to cut interest rates by 50 bps on Wednesday.

Sagar Dua FXStreet

The USD/CAD pair posts a fresh four-year high near the round-level resistance of 1.4200 in Tuesday’s European session. The Loonie pair strengthens as the US Dollar (USD) rises ahead of the United States (US) Consumer Price Index (CPI) data for November, which will be published on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, refreshes a two-day high at 106.35.

The inflation data is expected to influence market expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18. The Fed is highly anticipated to cut its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% next week, according to the CME FedWatch tool.

Economists expect the annual headline inflation to have accelerated to 2.7% from the October reading of 2.6%. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%. Month-on-month headline and core CPI are estimated to have grown steadily by 0.2% and 0.3%, respectively.

Signs of cooling price pressures would accelerate Fed dovish bets for policy meeting next week. On the contrary, hot inflationary pressures would weaken them.

Meanwhile, the outlook of the Canadian Dollar (CAD) remains weak as investors expect the Bank of Canada (BoC) to cut interest rates again by 50 basis points (bps) to 3.25% in the monetary policy meeting on Wednesday.

Significantly lower Unemployment Rate and price pressures remaining contained within bank’s target of 2% have led to dovish BoC bets.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

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