USD/CAD Slips as Hot Canadian Inflation Raises Risks of More BoC Hikes

CANADIAN DOLLAR FORECAST:

• Canadian dollar gains as sticky inflation raises the risks of further BoC’s rate hikes
• Canada’s April inflation accelerates to 4.4% y-o-y from 4.1% y-o-y, three-tenths of a percent above market expectations
• This article looks at key USD/CAD tech levels to watch in the near term

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The Canadian dollar strengthened against the U.S. dollar on Tuesday, bolstered by hotter-than-expected domestic inflation in response to higher rent prices and mortgage interest costs.

Canadian headline CPI jumped 0.7% on a monthly basis in April, pushing the annual rate to 4.4% from 4.3% previously, a meaningful increase that topped consensus estimates by three-tenth of a percent in both cases. Against this backdrop, USD/CAD fell 0.4% to 1.3407 in early morning trading, retreating for the second session in a row, a sign sellers may be re-entering the market again.

The Bank of Canada recently halted its tightening campaign after raising interest rates by 425 basis points since March 2022, but indicated that this was a conditional pause contingent on the inflation outlook evolving in line with forecasts. Last month’s CPI data probably does meet this criterion.

In this context, BoC could soon signal it is prepared to resume hiking borrowing costs or flag it will maintain an aggressive stance for longer than the market discounts if consumer prices do not downshift more rapidly. A hawkish message should be bullish for the Canadian dollar.

USD/CAD TECHNICAL ANALYSIS

USD/CAD has breached its 200-day simple moving average on the downside but needs to close below it to reinforce the bearish signals. If sellers manage to achieve this feat, we may soon see a retest of the 2023 lows. On further weakness, the focus shifts lower to 1.3225. On the flip side, if bulls regain control of the market and trigger a turnaround, initial resistance appears at 1.3465, followed by 1.3530.

USD/CAD TECHNICAL CHART

USD/CAD Chart Prepared Using TradingView