Canadian Dollar Weakens Amid US Inflation Concerns

The Canadian dollar weakened against the US dollar on Tuesday, influenced by higher-than-expected US inflation data, suggesting a potential delay in a US Federal Reserve rate cut. The Bank of Canada maintained its key overnight rate at 5%, signaling its reluctance to consider a rate cut yet, aiming to control inflation.

In February, the Canadian services sector continued to contract, although the rate of decline slowed down, boosted by optimism surrounding potential interest rate cuts and the economy's outlook, according to S&P Global Canada services PMI data released on Tuesday. The business activity index rose to 46.6, marking its highest level since October but still below the 50 threshold indicating contraction, extending a contractionary trend since June, the longest in three years.

Meanwhile, Canadian economic activity expanded at a slower pace in February, as indicated by Ivey Purchasing Managers Index (PMI) data released on Wednesday, with a decline in employment measures. However, Canada recorded a larger-than-expected trade surplus of C$496 million in January, attributed to a decrease in imports to a nearly two-year low, while exports fell at a slower rate. The decline in imports was primarily driven by consumer goods and motor vehicles, while exports decreased mainly in metal and non-metallic mineral products, aircraft, and other transportation equipment.

Canada's trading activity slowed with the United States, its largest trading partner, with both imports and exports decreasing in January, partly due to lower imports of motor vehicles and parts and pharmaceutical products, alongside reduced exports of aircraft.

In the US, the dollar fluctuated on Tuesday and Wednesday following hotter-than-expected inflation data, reducing expectations of a rate cut by the Federal Reserve in June.

US consumer prices increased in February, with the Consumer Price Index rising by 0.4%, slightly higher than forecasted, indicating some persistence in inflation. Gasoline and shelter prices were key drivers of the increase, leading to a year-on-year CPI gain of 3.2%. Core inflation excluding food and energy also rose, signaling sustained inflationary pressures. The US small business sentiment declined in February due to ongoing concerns about inflation.

The stronger-than-expected inflation data makes a Federal Reserve interest rate cut before June less likely, impacting market expectations. Market expectations for a rate cut at the June policy meeting stand at around 67%, down from 71% earlier in the week. Despite this, traders have priced in two more cuts by the end of 2024, bringing the fed funds rate (FFR) to 4.49%.

Looking ahead this week, currency investors are awaiting U.S. retail sales data and producer prices to gauge the resilience of consumer spending and potential inflationary pressures. Consequently, the USD/CAD currency pair is likely to maintain stability within a narrow range in the short term, with any potential strengthening of the Canadian dollar expected to be modest and confined to a limited scope.

Data for Technical Analysis (5H) CFD USD/CAD

Resistance : 1.3497, 1.3500, 1.3503

Support : 1.3491, 1.3488, 1.3485

5H Outlook  

Source: Investing.com  

Buy/Long 1 If the support at the price range 1.3476 - 1.3491 is touched, but the support at 1.3491 cannot be broken, the TP may be set around 1.3498 and the SL around 1.3469, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3497 - 1.3512, TP may be set around 1.3523 and SL around 1.3484, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3497 - 1.3512 is touched, but the resistance 1.3497 cannot be broken, the TP may be set around 1.3489 and the SL around 1.3519, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3476 - 1.3491, TP may be set around 1.3467 and SL around 1.3504, or up to the risk appetite.       

Pivot Points Mar 13, 2024 02:32AM GMT