Canadian Inflation Data: Upside Surprise, Impact on USD/CAD

George Solotarov
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Canadian Inflation Data: Upside Surprise, Impact on USD/CAD

Canadian inflation (Consumer Price Index - CPI) for March exceeded expectations, rising 2.9% annually compared to forecasts of 3.1%. Core CPI, excluding volatile food and energy, rose 2.0%. This data release is crucial for understanding the Bank of Canada's (BoC) likely monetary policy stance and the near-term direction of the Canadian Dollar (CAD).

Market Expectations and BoC Outlook

Analysts predicted sticky inflation for March, in line with trends seen in other G10 nations, particularly the US. While inflation has generally trended downward since August's 4%, it remains above the BoC's 2% target. If data matches expectations, investors may anticipate the BoC to maintain its restrictive stance longer than previously thought.

However, further tightening remains unlikely. During the recent BoC meeting, Governor Macklem emphasized the focus on core inflation trends and the need to see sustained disinflation before rate cuts occur.

Impact on USD/CAD

The USD/CAD pair has exhibited a bullish trend in 2024, recently breaking above the 1.3700 level. A significant surprise in the inflation data is required to dramatically alter market sentiment. A softer-than-expected CPI could fuel BoC rate cut expectations, bolstering the CAD. A hotter-than-expected CPI, mirroring recent US trends, could offer some support to the CAD but is unlikely to fully reverse the bullish USD/CAD bias.

Technical Analysis

Key technical levels for USD/CAD:

  • Upside Resistance: 1.3800 psychological level
  • Downside Support: 200-day Simple Moving Average (SMA) near 1.3515, January 31st low at 1.3358, December 2023 low at 1.3177

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