USD/CAD Forecast: Falling BoC Rate Cut Bets Boost CAD

• The Canadian dollar has fallen since Tuesday despite an unexpected jump in Canada’s inflation.

• Canada’s inflation rose at an annual rate of 2.9% in May.

• The greenback strengthened Wednesday as the yen fell to a new 38-year low.

The USD/CAD forecast shows slight bearish momentum as the Canadian dollar recovers from its recent slump amid a drop in BoC rate cut bets. However, the bullish trend remains, with the dollar rallying against most currencies due to a decline in the yen.

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The Canadian dollar has fallen since Tuesday despite an unexpected jump in Canada’s inflation. It is a sign that investors are more focused on the dollar, which is on the rise. Notably, data on Tuesday showed that Canada’s inflation rose at an annual rate of 2.9% in May. It was a much bigger-than-expected jump from the previous month’s 2.7%, leading to a decline in rate cut expectations. 

Bank of Canada policymakers were quite confident about the downtrend in price pressures when they cut rates for the first time in June. Therefore, investors had high expectations that the central bank would cut again in July. However, after the inflation numbers, these expectations have fallen. This should have given the Canadian dollar a big boost. However, dollar strength overshadowed Canada’s inflation surprise.

The greenback strengthened Wednesday as the yen fell to a new 38-year low. The catalyst behind this move is the wide gap in interest rates between Japan and the US. This has increased demand for the dollar compared to the yen, which weighs on other currencies like the Canadian dollar.

The dollar rose despite poor housing data showing a drop in new home sales in the US. Investors are now awaiting GDP data and the PCE price index report.

USD/CAD key events today

• US final GDP q/q
• US unemployment claims

USD/CAD technical forecast: Price pauses at 0.786 Fib and reverses

On the technical side, the USD/CAD price failed to close below the 0.786 Fib retracement level. Instead, it made a large wick before reversing and breaking above the 1.3680 key level and the 30-SMA. The break above the SMA indicates a shift in sentiment to bullish.

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Currently, the price is pulling back to retest the recently broken levels. However, since it remains above the 30-SMA with the RSI over 50, there is a high chance the bullish move will resume. Consequently, USD/CAD might revisit the 1.3780 key resistance level.

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