On Tuesday at 13:30 GMT, Statistics Canada is set to release the high-impact Consumer Price Index (CPI) data, a crucial event likely to sway market sentiment regarding a potential Bank of Canada (BoC) interest rate cut this year and impact the valuation of the Canadian Dollar.
Economists anticipate the Canadian CPI to show an annual growth rate of 3.3% in January, a slight slowdown from December’s 3.4%. On a monthly basis, a rebound to 0.4% is expected after December’s 0.3% decline. The Core CPI, excluding volatile items like food and energy, rose 0.1% month-on-month in December. Simultaneously, the BoC will publish its closely watched Core Consumer Price Index data, revealing an annual rise of 2.6% in December, with a monthly drop of 0.5%.
The anticipated dip in headline annual Canadian CPI inflation is attributed to lower energy and food prices. However, core CPI figures are expected to remain stable amid the BoC’s higher borrowing costs, leading to increased mortgage interest and rents.
TD Securities analysts suggest a potential decline in headline CPI to 3.2% year-on-year in January, with details reinforcing limited progress. They highlight that food and energy components will drive most of the deceleration, resulting in a mixed overall tone. The persistence in underlying inflation sets a high bar for any dovish shift from the BoC in March.
Bank of Canada Governor Tiff Macklem’s recent comments indicate a shift in policy discussion towards how long the policy should remain restrictive, acknowledging the slow path back to 2.0% inflation. Macklem warns of risks, particularly with shelter prices being a significant contributor to above-target inflation.
Market expectations, as per Canada’s overnight index swaps (OIS) curve, suggest a potential first-rate cut by the BoC in July. The outcome of the CPI data could significantly influence USD/CAD trading. A hotter-than-expected CPI could strengthen the Canadian Dollar, reinforcing the BoC’s stance on higher interest rates, while soft data might revive early rate cut expectations and drive USD/CAD higher.
Technical analysis by FXStreet’s Senior Analyst, Dhwani Mehta, suggests that USD/CAD is currently defending the 21-day Simple Moving Average (SMA) at 1.3470. A rebound could challenge the 100-day SMA at 1.3550, with the 1.3600 round level being a key target for buyers. On the downside, a daily closing below the 21-day SMA could open the door for a test of the 50-day SMA at 1.3410, with the February low of 1.3365 as the next relevant downside target. The CPI data release is poised to be a critical driver for USD/CAD movements in the coming days.
