Canadian Dollar flatlines as traders brace for US CPI release
- USD/CAD holds steady around 1.4120 in Tuesday’s early European session.
- The US October CPI inflation report will be the highlight on Tuesday.
- Canada's Unemployment Rate reached a six-month high in October.
The USD/CAD pair trades on a flat note near 1.4120 during the early European trading hours on Tuesday. Traders might prefer to wait on the sidelines ahead of the key US inflation data, which is due later in the day.
Stronger-than-expected US Nonfarm Payrolls (NFP) data released last week have reinforced expectations that the US Federal Reserve (Fed) could keep interest rates higher for longer, supporting the US Dollar (USD) against the Canadian Dollar (CAD). According to the CME FedWatch tool, markets are now pricing in nearly a 84.0% odds that the Fed will raise rates in December.
Traders await the US Consumer Price Index (CPI) inflation report later on Tuesday for fresh impetus. Economists expect the headline CPI to show a rise of 0.3% MoM in October, while the core CPI is projected to show an increase of 0.2%.
The report will not include an annual reading for October CPI because of the government shutdown a year ago, which prevented the BLS from collecting some data and compiling a full index level.
On the Loonie front, Canada's Unemployment Rate climbed to a six-month high of 6.7% in October with the economy shedding a net total of 4,700 jobs, Statistics Canada revealed last week. Money markets updated their bets on a Bank of Canada (BoC) rate hikes and are now pricing in another 25-basis-point increase in rates only in March, according to Reuters.
Loonie grinds higher but Scotiabank flags fragile fundamentals
Analysts at Scotiabank note that while the Canadian Dollar has advanced, “the Loonie’s relative performance is somewhat more underwhelming when compared to its peers, and highlights its role as a lower-beta risk and commodity currency.” They add that “the CAD’s strength is notable nonetheless, and threatening to deliver fresh local highs as it retraces its selloff from early September,” underscoring the extent of the recent rebound. However, the bank strikes a more guarded tone on the sustainability of the move, stating that “we are somewhat cautious however, given the renewed CAD-negative widening in US-Canada yield spreads, and note that recent CAD strength has not been confirmed by fundamentals.”
Barkin flags inflation risks but urges careful Fed path as economy stays resilient
Barkin’s latest remarks score 6.2 on the FXS Speechtracker, only marginally above the 6.1 historical average, underscoring a tone that is slightly more hawkish but broadly consistent with the established baseline. Emphasizing that “risk lies on the inflation side” while calling the policy path “straightforward” yet to be pursued “with care,” Barkin highlights resilient demand, broad-based cost pressures, and firms’ intent to pass on higher costs even as consumer sentiment remains “bleak” but spending persists. The combination of “remarkably stable” economic conditions, healthy loan pipelines, muted layoffs, and strong earnings reinforces a narrative of underlying strength that keeps the Fed biased toward guarding against renewed price pressures.
The FXS Fed Sentiment Index slipped by 0.66 points to 142.34, signaling a modest pullback in perceived hawkishness even as the gauge remains firmly above the neutral 100 mark. This configuration suggests that, while the immediate tone is slightly less hawkish at the margin, the overall policy backdrop still leans clearly toward vigilance on inflation risks rather than an imminent pivot toward easier Dollar policy.
Technical Analysis: USD/CAD keeps a bullish tone above the 100-day SMA
In the daily chart, USD/CAD holds a mild bullish bias as it consolidates above the 100-day Moving Average (MA) and the Bollinger Bands 20-day simple moving average. This positioning suggests underlying dip-buying interest, while the Relative Strength Index (14) around 56 points to moderate, rather than overextended, upside momentum after earlier overbought readings have eased.
On the downside, initial support is seen in the 1.4060–1.4045 area, where the Bollinger mid-line and the 100-day MA cluster, with a deeper cushion near the lower Bollinger Band around 1.3910 if selling accelerates. On the topside, immediate resistance emerges at the upper Bollinger Band near 1.4205, and a sustained break above this ceiling would open the door for a continuation of the broader upmove in the pair.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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