USD/CAD forecast: signal ahead of Canada inflation data

The USD/CAD exchange rate remained in a tight range on Tuesday morning as traders reacted to the upcoming Canadian consumer inflation data. It was trading at 1.3960, up by 1.50% from its lowest point this year.

Canada inflation data ahead

The USD/CAD exchange rate wavered ahead of the upcoming Canada inflation data. Economists polled by Reuters expect the data to show that the headline consumer inflation rose from 0.3% in March to 0.5% in April. 

On the positive side, analysts expect that the CPI fell from 2.3% in March to 1.6% on a YoY basis. If this is accurate, it will mean that Canada’s inflation will have moved below the Bank of Canada’s (BoC) target of 2.0%.

The core CPI, which excludes the volatile food and energy products, is expected to come in at 0.2% monthly and 2.4% annually. 

These numbers will likely push the BoC to deliver more interest rate cuts in the coming meetings. The bank has already cut rates seven times in this cycle, moving from 5% in April last year to 2.75%. The bank will likely stop cutting when rates move to 2.0%.

Read more: Bank of Canada holds interest rate at 2.75% amid global trade uncertainty

The BoC has cut interest rates to support the economy by lowering borrowing costs. These cuts have helped to support the economy as recent data revealed that the economy expanded by 1.7%, helped by higher consumer spending on services like telecommunication and rent.

Economists expect the Canadian economy to continue slowing because of Donald Trump’s tariffs. He added a 25% tariff on most items in his bid to lower the US trade deficit and attract foreign investments.

The ongoing crude oil prices will also hurt the Canadian economy. Brent crude oil dropped to $65.5, while West Texas Intermediate has moved to $62. Lower oil prices hurt Canada’s economy because it is the fourth biggest producer.

US credit rating downgrade

The USD/CAD exchange rate is also reacting to Moody's recent US credit rating downgrade. In a report on Friday, the agency slashed the rating from AAA to AA1, citing the soaring public debt and the debt servicing costs. 

While a credit rating downgrade is always a big thing, there are signs that the Moody’s one will have no major impact since the US lost its Triple A rating in 2011 when S&P Global slashed it.

Analysts anticipate that the Federal Reserve will not cut in the next two meetings, making the pair a good carry trade. In this, investors are borrowing the low interest rate Canadian dollar and investing in the higher-yielding Canadian dollar.

USD/CAD technical analysis

The daily chart shows that the USD/CAD exchange rate wavered on Tuesday as traders waited for the Canadian inflation data and statements by top Fed officials like Susan Collins and Raphael Bostic. 

It was trading at 1.3957, where it has been stuck at in the past few days. The pair has remained below the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bears are in control for now.

On the positive side, the USD/CAD pair has formed a small bullish flag pattern, a continuation sign. This pattern comprises of a vertical line and some consolidation and is one of the most bullish patterns in technical analysis.

Therefore, the USD/CAD forecast is neutral, with the key support and resistance levels being at 1.3900 and 1.4100. A move below the support at 1.3900 will point to more downside.