USD to CAD Price Forecast: US Inflation, Fed Rate Strategy Fueling Strength

Highlights

• Mixed U.S. jobs report cools labor market
• U.S. inflation data could exceed expectations
• Cooling Canadian job market reduces rate hike speculation

Overview

The USD to CAD is inching lower on Monday in a lackluster trader, following a mixed U.S. jobs report last Friday and a shift in market focus to U.S. inflation data due for release this week. This has left traders and investors with a mixed sentiment. Furthermore, volume is a little on the light side due to a bank holiday in Canada.

US Adds Fewer Jobs, but Wage Growth Remains Firm

July’s U.S. jobs report showed fewer jobs added than expected, however, a notable decline in unemployment and substantial wage gains softened the blow. This unexpected turn of events nudged the USD-to-CAD to a one-week high against a basket of currencies, due to indications of a continuously tight labor market. The situation could prompt the Federal Reserve to keep rates higher for longer, reflecting a labor market that’s cooling, not collapsing.

All Eyes on US Inflation Report

Investors eagerly anticipate the U.S. inflation data, due on Thursday. The forecast is a 4.7% annual rise in core inflation for July. The U.S.’s strong growth fundamentals and data-dependent central banking approach could lead to CPI numbers exceeding expectations.

Canada Job Market Cools

In Canada, the domestic jobs market exhibited signs of cooling, resulting in reduced speculations for additional interest rate hikes by the Bank of Canada. Consequently, the Canadian dollar, or loonie, weakened to a near two-month low against the U.S. dollar last Friday. The Canadian economy lost 6,400 jobs in July, pushing the jobless rate up to 5.5%. As a result, the possibility of another rate hike this year dropped from 80% to about 50%.

Short-Term Outlook:  Driven by US CPI Data

In short-term forecasts, the U.S. dollar and Canadian dollar’s trajectories are set to be influenced by the U.S. inflation data and developments in the labor market. While a stronger than expected inflation report could provide a bullish boost for USD, the cooling Canadian job market puts a bearish tint on the outlook for the loonie.

Technical Analysis

The current 4-hour price of USD/CAD at 1.3388 is slightly higher than the previous 4-hour close at 1.3376, indicating a mild upward momentum. The pair is trading above both the 200-4H moving average (1.3228) and the 50-4H moving average (1.3273), suggesting a bullish trend. Furthermore, a 14-4H RSI of 62.61 indicates stronger momentum, reinforcing the bullish sentiment.

Importantly, the current price has just breached the main resistance area (1.3360 – 1.3384), providing a further bullish signal. However, traders should watch for a potential reversal. Nonetheless, the USD/CAD is exhibiting a bullish bias in the short-term.