Canadian Dollar extends recovery with all eyes on inflation data

• USD/CAD drops 0.3% on Monday and extends its reversal from 1.4300 highs to levels below 1.4100.
• Later on Monday, Canada's CPI is expected to show raising inflation prices, and add pressure on the BoC to hike interest rates.
• The US Dollar remains in the same weak tone seen late last week as markets cut back hopes of back-to-back Fed rate hikes.

The Canadian Dollar (CAD) appreciates further against a moderately offered US Dollar (USD) on Monday, with markets awaiting the release of Canada’s Consumer Price Index (CPI) figures for September. The USD/CAD pair drops 0.3% in the day so far, hitting session lows sub-1.4100 for the first time in nearly one month and extending the reversal from last week’s highs at 1.4300.

Canada's consumer inflation is expected to have bounced up 0.2% in September after a 0.1% contraction in August, while the yearly CPI is forecast to have accelerated to a 3.2% rate, from 3% in the previous month.

BoC reveals increasing challenges to leave monetary policy steady

The Bank of Canada’s (BoC) Governor, Tiff Macklem, warned that week that the rising oil prices are making it increasingly difficult to maintain a steady monetary policy, which gave a hawkish tilt to October's meeting and provided additional support to the CAD. The BoC, however, is unlikely to hike rates next week, as tariff uncertainty and a softer labour market are likely to outweigh inflationary risks at the October 28 monetary policy meeting.

Francesco Pesole, analyst at ING, highlights that markets are “fully pricing in a 25bp December hike, as well as 9bp for next week’s meeting.” In his way, however, this “suggests limited upside for the Canadian Dollar, even if the October meeting is used to set the stage for a December move.”

Cooling hopes of another Fed rate hike are hurting the Greenback

In the US, the calendar is light on Monday and for most of the week. US data released last week confirmed that high energy prices are keeping inflationary pressures high, well above the Federal Reserve’s target. Fed officials, however, cooled hopes of back-to-back interest rate hikes.

Futures markets have cut back expectations of a Fed interest rate hike to 15%, from near 60% one month ago, according to data released by the CME’s FedWatch Tool, which sent the US Dollar tumbling against most of its peers last week.

Against this background, Economists at DBS Group Research suggest that “the coming week could see a shift from extending the USD’s recent rally to reassessing its sustainability.”

DBS experts observe that the Fed enters its blackout period, which will leave markets with fewer policy cues. With officials unable to guide expectations, DBS notes that “investors may be reluctant to add to crowded long USD positions,” particularly as “the same inflation pressures that have supported the USD amid Fed-hike expectations are now feeding political risks into the US outlook.”