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USD/CAD fluctuates near critical support ahead of Canadian inflation data release

Madoc Meredith August 20, 2024

Stack of Canadian $100 bills from 2012 — vitapix/E+ via Getty Images

By Zain Vawda

USD/CAD has approached a key support zone just above the 1.3600 mark in anticipation of Canadian inflation data on Tuesday. The Loonie has gained in recent weeks on rising WTI oil prices and Significant USD weakness.

The Canadian economy has been under scrutiny in recent months, showing signs of stagnation. During this period, unemployment rose even as inflation fell year-on-year to around 2.7%, the lowest level of the year.

Chart showing inflation rate year-on-year — Inflation rate compared to previous year (Source: TradingEconomics)

With the unemployment rate rising and retail sales declining, among other data points, the Bank of Canada (BoC) will be keen to prevent inflation from rising. Such an event would further complicate matters for the Canadian central bank, which has already cut interest rates by 50 basis points this cycle and could make further cuts. if economic growth continues to be sluggish.

Therefore, preventing a rise in inflation before the next central bank meeting is likely to be a top priority for the BoC.

Canadian inflation and retail sales data at a glance

Canadian inflation data will be released on Tuesday, followed by statements from several U.S. Federal Reserve policymakers. The recent dovish stance from Fed officials has put pressure on the U.S. dollar since Friday and continued into Monday’s session, with the DXY hitting new lows.

Retail sales on Friday will be equally important, especially as May’s poor numbers have raised fears of a possible recession. The Bank of Canada is hoping for a significant improvement in June, when the impact of the rate cuts will become apparent.

MarketPulse Economic Data Calendar — Source: MarketPulse Economic Calendar

Technical Analysis

From a technical perspective, USD/CAD has seen a sharp decline from the August 5 high around 1.3900. The decline was accelerated by fundamental data and the developing rate cut environment, causing USD/CAD to slide lower faster than usual.

When the price broke the 1.3900 level, a wedge pattern was broken, but the lower boundary of this wedge is at a key support zone near the 1.3600 level.

In addition, the 200-day moving average is located around this level, creating a significant confluence zone that should theoretically provide support.

Tuesday’s inflation data could push the pair in one direction or the other depending on the outcome, with the DXY also playing a crucial role in determining the next move in USD/CAD.