During the Asian session on Tuesday, the USD/CAD pair exhibited strength, trading above the key psychological level of 1.3500, supported by a robust US Dollar (USD). The pair, currently at 1.3506, has gained 0.12% on the day. Market attention is turning towards the upcoming Canadian inflation data, anticipated to influence market volatility in preparation for the Federal Open Market Committee (FOMC) Minutes.
The recent surge in the USD/CAD pair is attributed to a stronger US Dollar, with the January Producer Price Index (PPI) data revealing the most significant increase since August 2023. This signals heightened inflationary pressures in the US economy, prompting investors to revise their expectations for Federal Reserve (Fed) interest rate cuts from May to June. The FOMC Minutes from January’s policy meeting are awaited for insights into the future trajectory of interest rates.
On the Canadian front, the focus shifts to the January Consumer Price Index (CPI) data scheduled for Tuesday. Forecasts suggest a slight easing from December’s 3.4% year-on-year to 3.3%. The Bank of Canada (BoC) has emphasized the substantial role of housing in supporting inflation, and markets do not anticipate an interest rate cut before the BoC’s June monetary policy decision.
However, the rise in crude oil prices may act as a counterbalance, supporting the commodity-linked Canadian Dollar (CAD) and potentially capping the upside of the USD/CAD pair. Canada, being the largest oil exporter to the United States, experiences heightened sensitivity to fluctuations in oil prices.
As the day progresses, attention will turn to the Canadian CPI inflation data, with potential market implications depending on the outcome. Looking ahead to the week, investors will closely monitor the FOMC Minutes on Wednesday, along with speeches from the Fed’s Bostic and Bowman, providing additional insights into the future direction of monetary policy.
