Canadian Dollar Pauses Rally Ahead of US Inflation Data

Key Moments

USD/CAD Stabilizes After Multi-Day Slide

The USD/CAD pair inched higher during the Asian session on Wednesday, halting a three-day decline that had driven the exchange rate down to the 1.3915 area, its lowest point since June 10. Despite this modest rebound, the move lacked strong follow-through, with the pair trading near 1.3930 as market participants waited for the latest U.S. inflation data.

The upcoming U.S. Consumer Price Index (CPI), scheduled for release later in the day, along with the Producer Price Index (PPI) due on Thursday, were set to provide fresh insight into the Federal Reserve’s policy outlook. Expectations for how the Fed might proceed were seen as a key factor for near-term U.S. Dollar demand and, by extension, for the direction of USD/CAD.

In the interim, conflicting drivers were seen discouraging traders from taking large directional positions or betting on a pronounced appreciation in either currency.

Oil Strength and Geopolitics Support the Loonie

Crude oil prices jumped to a one-and-a-half-week high on Tuesday after an advisor to Iran’s Supreme Leader Mojtaba Khamenei stated that the Strait of Hormuz would remain closed until the United States met Tehran’s demands. At the same time, Iran-backed Houthi rebels in Yemen intensified attacks on vessels transiting the Red Sea and Bab el-Mandeb Strait, with Saudi ships reportedly among the targets.

These developments sustained war-risk premiums in energy markets and acted as a tailwind for oil prices. Given the Canadian Dollar’s close correlation with commodities, and oil in particular, the move in crude continued to lend support to the Loonie and restrained further advances in USD/CAD.

Fed Expectations and Risk Sentiment Bolster the U.S. Dollar

Investors remained concerned that higher energy prices could reignite inflationary pressures and prompt the Federal Reserve to adopt a more hawkish stance. According to CME Group’s FedWatch Tool, market participants were assigning more than a 75% probability that the Fed would raise interest rates by the end of this year.

This rate outlook, combined with ongoing geopolitical uncertainty, underpinned demand for the safe-haven U.S. Dollar and helped curb the downside in USD/CAD. These factors were seen as reasons for caution among bearish traders targeting further declines in the pair.

Technical Picture: Key Levels for USD/CAD

On the technical front, USD/CAD was holding just above the 100-day Simple Moving Average (SMA) at 1.3919 and the 50.0% Fibonacci retracement of the May-June advance, signaling underlying buying interest following the recent pullback.

A decisive move below both the 100-day SMA and the 50.0% retracement level at 1.3898 would leave USD/CAD more vulnerable to a test of the 61.8% Fibonacci retracement at 1.3817, with additional support seen at 1.3701 and 1.3553.

On the upside, initial resistance was identified at the 38.2% retracement at 1.3980, followed by a more substantial barrier near the 23.6% level around 1.4081, before the pair would confront the cycle high at 1.4244.