USD/CAD has been trading within a tight range recently, reflecting the consolidation of the US Dollar Index and the potential rate differential between Canada and the US. The recent volatility in Canada’s inflation and struggling labor market have put pressure on the Bank of Canada (BoC) to make decisions regarding interest rates.
The US economy has seen a decline in headline inflation for three consecutive months, while Canada has experienced choppy inflation since February. The fluctuating inflation in Canada poses a challenge for the BoC. Additionally, the labor market in Canada is under strain, further complicating the central bank’s decisions. Market expectations suggest a 65.1% chance of a rate cut at the upcoming BoC meeting on July 24, 2024.
The focus this week is on the upcoming US inflation release, which is expected to show a moderation to 3.1% in June. A result in line with or below this consensus figure could maintain interest among US Dollar doves and potentially increase rate cut probabilities, possibly exceeding the 80% mark.
From a technical perspective, USD/CAD is currently positioned between the 100-day moving average at 1.3640 and the 200-day moving average at 1.3596. This tight range and consolidation may lead to a breakout following the inflation data release. Key support levels for USD/CAD include 1.3596 (200-day MA), 1.3500 (psychological level), 1.3450, and 1.3370 (February swing low). On the other hand, resistance levels include 1.3640, 1.3736, 1.3846, and 1.4000 (psychological level).
As market participants await the inflation data release, there is potential for USD/CAD to make a significant move. The historical price action and recent consolidation of the US Dollar Index suggest that a breakout may be on the horizon. Traders and investors will be closely monitoring the inflation data to gauge the direction of USD/CAD in the near term.
