USD/CAD Range Vulnerable to Slowing US PCE Inflation

US Dollar Outlook: USD/CAD

USD/CAD approaches the week high (1.3238) as it attempts to retrace the decline following the Federal Reserve interest rate decision, but data prints coming out of the US may drag on the Greenback as the Personal Consumption Expenditure (PCE) Price Index is anticipated to show slowing inflation.

USD/CAD Range Vulnerable to Slowing US PCE Inflation

USD/CAD consolidates after registering a fresh yearly low (1.3093) earlier this month, and the limited reaction to the Fed rate-hike may keep the exchange rate within a defined range amid speculation of a looming change in regime.

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Source: CME

According to the CME FedWatch Tool, market participants are pricing a greater than 60% probability of seeing a Fed Funds rate of 5.25% to 5.50% at the end of 2023, and expectations surrounding US monetary policy may sway USD/CAD as the central bank appears to be nearing the end of its hiking-cycle.

US Economic Calendar

FOREX.com Economic Calendar

As a result, the update to the PCE may drag on USD/CAD as the core rate, the Fed’s preferred gauge for inflation, is seen narrowing to 4.2% in June from 4.6% per annum the month prior, and a marked slowdown in price growth may push the Federal Open Market Committee (FOMC) to the sidelines as the central bank pledges to ‘make our decisions meeting by meeting.’

However, a stronger-than-expected core PCE print may generate a bullish reaction in the Greenback as it puts pressure on the FOMC to pursue a more restrictive policy, and it remains to be seen if Chairman Jerome Powell and Co. will adjust the forward guidance at the September meeting as the central bank is slated to update the Summary of Economic Projections (SEP).

Until then, data prints coming out of the US and Canada may influence USD/CAD as both the FOMC and Bank of Canada (BoC) continue to combat inflation, but the recovery from the yearly low (1.3093) may end up being short-lived as the exchange rate consolidates within a narrow range.

With that said, a marked slowdown in the US PCE may drag on USD/CAD, and the exchange rate may track the negative slope in the 50-Day SMA (1.3309) as it failed to push above the moving average during the previous month.

Canadian Dollar Price Chart – USD/CAD Daily

Chart Prepared by David Song, Strategist; USD/CAD Price on TradingView

• USD/CAD registered a fresh yearly low (1.3093) after failing to push above the 50-Day SMA (1.3309), and the exchange rate may track the negative slope in the moving average as it struggles to push back above the 1.3230 (100% Fibonacci extension) to 1.3310 (50% Fibonacci retracement) region.
• Failure to defend the yearly low (1.3093) may push USD/CAD towards the 1.2980 (61.8% Fibonacci retracement) to 1.3030 (78.6% Fibonacci extension) area, with the next region of interest coming in around the September 2022 low (1.2954).
• Nevertheless, USD/CAD may continue to consolidate as it holds within last week’s range, with a break/close above the 1.3230 (100% Fibonacci extension) to 1.3310 (50% Fibonacci retracement) region bringing the monthly high (1.3387) on the radar.

Additional Market Outlooks

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--- Written by David Song, Strategist

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