Ahead of the US CPI release, Canadian Dollar holds steady

Little changed near 1.4120, USD/CAD remains steady in early European trading on Tuesday.
Tuesday’s key focus will be the October US CPI inflation release.
October saw Canada's unemployment rate touch its highest level in six months.

A subdued USD/CAD is trading around 1.4120 in Tuesday’s early European session, with traders potentially opting to stay on the sidelines before the crucial US inflation release later in the day.

The US Dollar (USD) has drawn support against the Canadian Dollar (CAD) from expectations that the US Federal Reserve (Fed) could maintain higher interest rates for longer. Those expectations strengthened after last week’s better-than-expected US Nonfarm Payrolls (NFP) figures. Markets now assign a probability of nearly 84.0% to a December Fed rate increase, according to the CME FedWatch tool.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

For their next market cue, traders are looking to Tuesday’s US Consumer Price Index (CPI) inflation release. A 0.3% MoM increase in headline CPI for October is expected by economists, alongside a projected 0.2% rise in core CPI.

No annual October CPI reading will feature in the report. The government shutdown a year ago left the BLS unable to collect some of the data needed to compile a full index level.

For the Loonie, last week’s figures from Statistics Canada showed that a net loss of 4,700 jobs in October accompanied a rise in Canada's unemployment rate to 6.7%, a six-month high. According to Reuters, money markets have revised their Bank of Canada (BoC) rate-hike bets and now price in another 25-basis-point increase only in March.

Can the Loonie sustain its gains as Scotiabank questions the fundamentals?

Despite the Canadian Dollar’s advance, Scotiabank analysts point out that “the Loonie’s relative performance is somewhat more underwhelming when compared to its peers, and highlights its role as a lower-beta risk and commodity currency.” Highlighting the scale of the recent recovery, they add that “the CAD’s strength is notable nonetheless, and threatening to deliver fresh local highs as it retraces its selloff from early September,” The bank is nevertheless more circumspect about whether the gains can last: “we are somewhat cautious however, given the renewed CAD-negative widening in US-Canada yield spreads, and note that recent CAD strength has not been confirmed by fundamentals.”

Why does Barkin favour a careful Fed path despite inflation risks and economic resilience?

A reading of 6.2 on the FXS Speechtracker places Barkin’s latest comments just above the historical average of 6.1, suggesting a slightly more hawkish stance that remains broadly in line with his established baseline. Barkin describes the policy course as “straightforward” but says it must be followed “with care,” stressing that “risk lies on the inflation side”. His remarks highlight resilient demand, widespread cost pressures and companies’ plans to pass on increased costs. Although consumer sentiment remains “bleak”, spending continues. With economic conditions “remarkably stable”, healthy loan pipelines, limited layoffs and strong earnings together point to underlying resilience, leaving the Fed inclined to guard against a resurgence in price pressures.

Perceived hawkishness eased modestly as the FXS Fed Sentiment Index fell 0.66 points to 142.34, though it remained well above the neutral threshold of 100. The reading indicates a slightly less hawkish near-term tone at the margin. Even so, the broader policy setting continues to favour vigilance against inflation risks rather than an imminent shift towards easier Dollar policy.

Technical Analysis: Can USD/CAD maintain its bullish bias above the 100-day SMA?

Consolidation above both the 100-day Moving Average (MA) and the Bollinger Bands’ 20-day simple moving average leaves USD/CAD with a modest bullish bias on the daily chart. The setup points to underlying buying interest on declines. Meanwhile, with earlier overbought readings having eased, the Relative Strength Index (14) near 56 indicates moderate upside momentum rather than an overstretched advance.

The upper Bollinger Band around 1.4205 presents the immediate hurdle on the upside; a sustained move beyond it would pave the way for the pair’s broader rally to extend. Initial downside support lies in the 1.4060–1.4045 zone, where the Bollinger mid-line converges with the 100-day MA. Should selling gather pace, the lower Bollinger Band near 1.3910 offers a further cushion.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar: Frequently asked questions

Which major factors influence the Canadian Dollar?

Movements in the Canadian Dollar (CAD) are shaped chiefly by interest rates set by the Bank of Canada (BoC), Oil prices, economic health, inflation and the trade balance, or the difference between the value of Canada’s exports and imports. Oil is Canada’s largest export. Market sentiment matters too: investors may either favour riskier assets in a risk-on environment or seek safe havens when markets turn risk-off. Risk-on sentiment generally supports the CAD. The condition of the US economy is another major influence, given that the US is Canada’s largest trading partner.

How can Bank of Canada decisions affect the Canadian Dollar?

By determining the interest rate at which banks lend to each other, the Bank of Canada (BoC) has a substantial influence on the Canadian Dollar. That rate, in turn, affects borrowing rates across the economy. Keeping inflation within 1-3% is the BoC’s primary objective, pursued by raising or lowering interest rates. Relatively high rates usually support the CAD. Credit conditions can also be influenced through quantitative easing or quantitative tightening: easing tends to weigh on the CAD, while tightening tends to strengthen it.

Why do Oil prices matter for the Canadian Dollar?

Because petroleum is Canada’s largest export, changes in Oil prices tend to have an immediate bearing on the Canadian Dollar, making them a major driver of its value. Rising Oil prices generally lift the CAD as overall demand for the currency grows; falling Oil prices tend to have the reverse effect. A positive trade balance also becomes more likely when Oil prices are higher, providing additional support for the CAD.

What effect can inflation figures have on the Canadian Dollar?

Traditionally, inflation was regarded as a drag on currencies because it erodes the value of money. With cross-border capital controls having eased in modern times, however, the effect has actually been the reverse. Higher inflation often prompts central banks to raise interest rates, drawing additional capital from global investors seeking attractive returns on their money. Demand for the domestic currency consequently rises; in Canada, that currency is the Canadian Dollar.

Why does economic data matter for the Canadian Dollar’s value?

The Canadian Dollar can respond to macroeconomic releases because they provide a measure of the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all help determine the CAD’s direction. Economic strength supports the currency by attracting more foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on the CAD.