CAD Braces for CPI as Policy Divergence Looms

Key Takeaways:

* Canadian Dollar steady as markets await CPI, with core inflation stuck near 3% keeping BoC cautious despite softer headline trends.

*Oil and housing data provide only modest support, while rising CAD shorts highlight bearish positioning and investor skepticism.

*Policy divergence with the Fed caps USD/CAD upside, but global risk sentiment and Powell’s Jackson Hole remarks remain key swing factors.

Market Summary:

The Canadian Dollar (CAD) traded cautiously as markets braced for July CPI, a release seen as pivotal for the Bank of Canada’s (BoC) policy outlook. Headline inflation is expected to ease slightly to 1.8% year-over-year, but core measures trim and median remain elevated near 3%, underscoring sticky domestic price pressures. This divergence complicates the BoC’s path after its March rate cut, with investors pricing a 68% chance the bank holds rates steady at 2.75% in September.

Commodity and housing dynamics offered only modest tailwinds. WTI crude rose 0.5% to $63.11/barrel, while July housing starts jumped 4% to 294,100 units. However, these gains were overshadowed by bearish positioning, as CFTC data showed CAD shorts rising to their highest since June. Canadian bond yields ticked higher, with the 10-year at 3.489%, reflecting lingering inflation concerns.

Monetary policy divergence with the U.S. remains a defining factor. While Fed rate-cut expectations have firmed as markets price an 84% chance of easing in September after softer U.S. CPI and retail sales that the BoC may remain cautious if core inflation proves stubborn. This relative policy stance could cap USD/CAD upside, though broad dollar strength tied to Fed Chair Powell’s upcoming Jackson Hole remarks remains a risk.

Geopolitical and trade risks continue to weigh on sentiment. Retaliatory tariffs and resilient consumer demand are fueling domestic inflationary pressures, while fragile global risk appetite adds volatility. Any hawkish tilt from Powell this week could revive dollar buying, keeping CAD under pressure, though a hotter Canadian CPI print may provide temporary support.

In the near term, the Loonie’s trajectory hinges on inflation data. A stronger-than-expected print may ease pressure on the currency by reinforcing BoC caution, while softer inflation could fuel expectations of deeper BoC cuts, leaving CAD vulnerable to underperformance against the euro and yen.

Technical Analysis 

USDCAD, H4

USD/CAD is consolidating near 1.3804 after recently bouncing off the 1.3752 support zone. The pair has been trading in a sideways range following its earlier rally, with buyers defending the 50-period moving average and keeping price action stable above key near-term support levels. Immediate resistance lies at 1.3855, a level that has capped upside momentum in recent sessions. A sustained break above this zone could open the door toward the 1.3967 resistance area, while failure to clear it may see the pair remain rangebound or slip back toward 1.3752.

Momentum indicators show a balanced tone. The Relative Strength Index (RSI) is hovering around 55, suggesting neutral momentum with neither side in strong control. The MACD is flat near the zero line, reflecting a lack of clear directional bias as the pair consolidates.

Overall, USD/CAD is holding steady above 1.3752, with traders watching for a breakout above 1.3855 to confirm renewed bullish momentum. On the downside, a decisive move below 1.3752 could shift focus back toward 1.3653 support.

Resistance levels: 1.3855, 1.3967
Support levels: 1.3752, 1.3653