The USD/CAD exchange rate rallied to its highest level since November 2020 after the Bank of Canada delivered another jumbo rate cut. It rose to 1.4247, up by almost 20% from its lowest level in 2020.
Canada inflation data ahead
The USD/CAD pair jumped after the BoC slashed interest rates by 0.50% last week, bringing the official cash rate to 3.25%. It has been the most aggressive central bank in slashing rates as it moved them from 5.5% earlier this year.
The BoC has slashed rates so much because of the ongoing woes in the Canadian economy. Recent data showed that the economy expanded by 0.3% in the third quarter, a slowdown from the 0.5% in the last two quarters.
Canada’s unemployment rate remains stubbornly high, while inflation has moved to the bank’s target of 2.0%. The last CPI data showed that inflation moved to 2.0%, down from over 8% in 2022.
At the same time, crude oil prices have slipped this year, with the West Texas Intermediate (WTI) and Brent falling to $73 and $70, respectively. Canada is usually affected by lower oil prices because it is one of the biggest exporters.
Canada is also bracing for the upcoming Trump administration and its volatility. He has pledged to add tariffs on Canadian goods, dealing a major blow to the USMCA deal that he signed in the first term.
The next key catalyst for the USD/CAD pair will be the upcoming Canadian inflation data scheduled on Tuesday. Economists expect the data to show that the headline CPI dropped from 0.4% in October to 0.1% in November. The CPI is expected to remain at 2.0% on a YoY basis.
Core inflation, which excludes the volatile food and energy prices, is expected to move from 2.2% to 2.1%.
Fed decision ahead
The other key USD/CAD news will come out on Tuesday when the US releases the latest retail sales, industrial, and manufacturing production numbers. Economists expect the data to show that retail sales rose from 0.4% in October to 0.6% in November.
Core sales, which excludes the volatile food and energy prices, are expected to move from 0.1% to 0.4%.
These numbers will come as the Fed starts its two-day meeting, which will culminate in its interest rate decision on Wednesday.
Economists expect the bank to continue cutting rates, moving them from 4.75% to 4.5%. However, the bank may also adopt a hawkish tone due to the inflationary nature of Trump policies like tariffs and deportations.
USD/CAD technical analysis
USD/CAD chart by TradingView
The daily chart shows that the USD to CAD exchange rate has been in a strong uptrend in the past few weeks. It has risen in the last four consecutive weeks, reaching its highest point since 2020.
The pair has also moved above the key resistance point at 1.3975, its highest point in October 2022, and the upper side of the ascending triangle pattern. It has also remained above the 50-week and 25-week moving averages and the 78.6% Fibonacci Retracement level.
Also, the Relative Strength Index (RSI) and the MACD indicators have all pointed upwards. Therefore, the path of the least resistance for the pair is bullish, with the next point to watch being 1.4676, the highest point in 2020.
This rally is happening because the US economy is doing modestly better than Canada. Also, a carry trade has emerged, where investors borrow from Canada and invest in the higher-yielding United States.
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