USD/CAD rallies above 1.3600 on surprisingly soft Canadian Inflation, Fed policy eyed

• USD/CAD jumps above 1.3600 as Canadian consumer inflation surprisingly eases in February.
• BoC’s preferred inflation measure decelerated to 2.1% from 2.4% in January on a year-on-year basis.
• The market sentiment remains downbeat amid uncertainty ahead of Fed policy.

The USD/CAD pair soars above the round-level resistance of 1.3600 in the early New York session on Tuesday. The Loonie asset strengthens as the Canadian Consumer Price Index (CPI) for February turns out surprisingly softer than expected.

The annual headline CPI grew at a slower pace of 2.8% than expectations of 3.1% and the former reading of 2.9%. On a monthly basis, the headline CPI rose by 0.3% against the expectation of 0.6%. The Bank of Canada’s (BoC) preferred inflation measure, which strips of eight volatile items grew at a steady pace of 0.1% monthly. The underlying inflation decelerated to 2.1% from 2.4% in January.

The soft inflation data could prompt expectations that the BoC will reduce interest rates sooner than expected. When the BoC considers reducing interest rates, the Canadian dollar faces liquidity outflows.

Meanwhile, the Canadian Dollar has also been weighed down by dismal market sentiment. The appeal for risk-perceived assets weakens amid uncertainty ahead of the Federal Reserve’s (Fed) interest rate decision, which will be announced on Wednesday. The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50%. The US Dollar Index (DXY) rises to 103.85 as demand for safe-haven assets improves.

Apart from the Fed’s policy decision, investors will focus on the dot plot and economic projections. The dot plot shows policymakers' interest rate projections for different timeframes.