How could the Canada CPI data affect USD/CAD?

The Canadian Dollar is consolidating its recovery from two-month lows of 1.3586 against the US Dollar heading toward Tuesday’s CPI showdown. Hot inflation data from the United States helped the US Dollar gain some ground last week but growing expectations of delayed US Federal Reserve (Fed) rate cuts capped the Greenback’s upside. Markets now price in a 66% chance of a June Fed rate cut, the CME Group’s FedWatch Tool shows.

The Canadian Dollar could extend its recovery if the headline and core CPI figures come in hotter-than-expected and reinforce the BoC’s narrative of “higher interest rates for longer”. In such a case, USD/CAD could revisit the 1.3400 area. In contrast, soft Canadian inflation data could bring back early BoC rate cuts bets on the table, allowing USD/CAD to resume its uptrend toward 1.3600.

Dhwani Mehta, FXStreet’s Senior Analyst offers key technical levels for trading USD/CAD on Canada’s inflation report: “USD/CAD continues to defend the horizontal 21-day Simple Moving Average (SMA) at 1.3470, as the 14-day Relative Strength Index (RSI) indicator sits above the midline.”

“If the 21-day SMA at 1.3470 holds the fort, USD/CAD could rebound to challenge the 100-day SMA at 1.3550 on its way to the two-month high of 1.3586. Further up, the 1.3600 round level will be on buyers’ radars. On the downside, daily closing below the 21-day SMA will reopen floors for a test of the 50-day SMA at 1.3410. The next relevant downside target is seen at the February low of 1.3365,” Dhwani adds.