USD/CAD: Eyes on inflation report as reversal sets stage for further downside

USD/CAD prints a bearish engulfing candle after protracted uptrend
Canadian inflation report provides near-term event risk
Markets split on whether BoC will deliver consecutive 50bp cuts

Overview

The Canadian dollar is gaining traction ahead of today’s key inflation report, with USD/CAD signalling a potential reversal to kick off the week. However, whether this momentum carries beyond the near term will likely depend on shifts in US interest rate expectations rather than domestic drivers.

Canada inflation key risk event

Today’s inflation report is a standout in a slow global data week. The annual CPI rate is expected to climb from 1.6% to 1.9% in October, nearing the midpoint of the Bank of Canada’s (BoC) 1-3% target range. Core inflation, which is the average of Statistics Canada’s trim and median CPI readings, is expected to pint at 2.4%, slightly above September’s pace.

With the BoC forecasting core inflation of 2.3% by December, a result in line with market expectation should do little to diminish the view that further rate cuts are in the pipeline. However, an upside surprise could see the BoC start to slow the pace of easing.

Source: Bank of Canada

In the policy statement released on October 23, the BoC said the timing and pace of further reductions in the policy rate will be guided by “incoming information and our assessment of its implications for the inflation outlook”, adding it will take decisions “one meeting at a time.”

The BoC next meets on December 11, with not only today’s inflation report but also fresh information on retail sales, producer prices, GDP, wages growth and employment released in between.

BoC easing cycle: fast start, slower end

Swaps markets remain undecided on whether the Bank of Canada will deliver another 50bps rate cut at its next meeting, following October’s reduction. Currently, traders lean slightly toward a smaller 25-point cut, with a 50-point move deemed a 44% probability.

Looking further out, the easing cycle is expected to slow dramatically. Markets are pricing in a cumulative 88 basis points of cuts by September 2025, signalling a more gradual approach.

Source: Bloomberg

USD/CAD: directional risks skewing lower?

Source: TradingView

The Canadian dollar delivered a reversal signal against the greenback on Monday, with USD/CAD printing a bearish engulfing candle on the daily chart. After trading within an uptrend since early November, this suggests directional risks could be turning, even if momentum indicators like RSI (14) and MACD are yet to confirm.

USD/CAD briefly tried to bounce during the Asian session but stalled at 1.4034, the low from last Friday. For those considering shorts, this level provides a decent setup, allowing for entry beneath with a tight stop above for protection.

To make the trade stack up from a risk/reward perspective, it will require the price to break minor support at 1.4003 first, opening the path toward 1.3959, a level that acted as resistance in late October and early November.

-- Written by David Scutt

Follow David on Twitter @scutty

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