USD/CAD Price Forecast: Stabilizes above 20-day EMA after US-Canada CPI data
- USD/CAD trades calmly near 1.3720 as the US Dollar demonstrated strength, following US CPI data for June.
- The US and Canadian inflation report showed that price pressures rose due to Trump’s tariff policy.
- Traders pare Fed dovish bets as the impact of Trump’s tariff policy has started slowing into prices.
The USD/CAD pair trades quietly close to the two-week high around 1.3720 during the Asian trading session on Wednesday. The Loonie pair demonstrates strength as the US Dollar (USD) gains after the United States (US) Consumer Price Index (CPI) data for June showed that President Donald Trump’s tariff policy has started feeding into prices.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near a fresh three-week high of 98.60 posted on Tuesday.
The data on Tuesday signaled that prices of products majorly imported into the US are rising as companies have started passing on the impact of higher tariffs to consumers. This led to traders reassess their bets supporting interest rate cuts by the Federal Reserve (Fed) in its policy meeting in September.
Analysts at Principal Asset Management stated, “With increases in categories like household furnishings, recreation, and apparel, import levies are slowly filtering through, it would be wise for the Fed to remain on the sidelines for a few more months at least.”
Meanwhile, inflation in Canada also grew at a faster pace due to trade uncertainty, given higher tariffs imposed by the US. Statistics Canada stated that price pressures would continue to increase if the trade uncertainty persists for longer.
USD/CAD strives to break over-a-week range between 1.3638 and 1.3710 decisively on the upside. The pair aims to stabilize above the 20-day Exponential Moving Average (EMA), which trades close to 1.3682, suggesting that the near-term trend is turning bullish. However, the broader trend remains bearish as the 200-day EMA slopes downwards to near 1.3915.
The 14-day Relative Strength Index (RSI) hovers around 50.00, indicating that the pair lack momentum on either side.
Going forward, an upside move by the pair above the May 29 high of 1.3820 would open the door towards the May 21 high of 1.3920, followed by the May 15 high of 1.4000.
On the contrary, the asset could slide towards the psychological level of 1.3500 and the September 25 low of 1.3420 if it breaks below the June 16 low of 1.3540.
USD/CAD daily chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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