Canadian Dollar gains ground with inflation data set to test BoC outlook
USD/CAD trades around 1.3860 on Monday at the time of writing, down 0.11% on the day. The pair extends its decline as the US Dollar (USD) remains under pressure against the Canadian Dollar (CAD), with investors scaling back expectations of further monetary tightening by the Federal Reserve (Fed).
The Canadian dollar has gained ground against the US dollar, following the release of upcoming inflation data that could impact the Bank of Canada's (BoC) outlook. As of Monday, the USD/CAD exchange rate was trading at 1.3860, down 0.11% for the day. The decline in the US dollar's strength is attributed to a series of disappointing US economic releases, including a drop in retail sales, which has reduced the probability of an imminent Fed rate hike.
In Canada, investors are eagerly awaiting the July Consumer Price Index (CPI) data, which is expected to show a modest increase in headline inflation to 2.9% year-over-year, up from 2.8% in June, and a rise of 0.7% month-over-month. The Bank of Canada has maintained its policy rate at 2.25% for six consecutive meetings, with Governor Tiff Macklem stating that the central bank will not allow higher energy prices to translate into persistent inflation.
Analysts from Brown Brothers Harriman predict that USD/CAD will test key support at the 200-day moving average (1.3849) ahead of the Canada July CPI release. TD Securities expects headline CPI to increase by only 0.1 percentage points to 2.9% year-over-year in July, with core CPI (ex. food & energy) at 1.8% year-over-year and core CPI (average of trim and median) at 1.85% for the second consecutive month.
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