USD/CAD plunges and refreshes 2-month lows as US inflation cools down

• USD/CAD plummets after hitting a daily high near the 1.2900 mark.
• July’s US Consumer Price Index (CPI) slows to 0% MoM.
• Despite US inflation data, ING Analysts expect the Fed to hike 75 bps in September.
• Fed’s Evans and Kashkari will cross wires late during the day.

The USD/CAD nosedives after a softer than estimated US inflation report, used by investors as an excuse to shift towards riskier assets, awaiting Fed policymakers which could pave the way towards the FOMC September monetary policy meeting. Consequently, mood improved, additionally spurred by China-Taiwan tussles tempering as the former announced the end of its military drills, but it will continue patrolling the Taiwan strait.

The USD/CAD is trading at 1.2762 after hitting a daily high at 1.2895, but better-than-expected US inflation data sent the dollar tumbling close to 1.50%, with the US Dollar Index dropping from 106.403 to 104.840.

USD/CAD sinks as US inflation eases

Before Wall Street opened, the Labor Department reported that US inflation in July rose by 8.5% YoY, less than the 9.1% in June and lower than the 8.7% estimate. Excluding volatile items like food and gas, it increased by 5.9%, less than forecasts, and aligned with June’s reading.

According to ING analysts, the report provides the “notion” that US headline inflation peaked, with gasoline prices down $1 a gallon from their highest in June. “We are forecasting the YoY rate dropping to 8.3%.” They added that core inflation would likely remain on its “upward trajectory” due to higher rental costs, services sector inflation pressures, and wages.

Analysts added, “we don’t see core inflation peaking until around September/October time with the core rate up at around 6.5% YoY by then.” Furthermore, they commented that they expect the Fed to tighten 75 bps.

The reasoning is that “…inflation remains far from the target, the economy added more than half a million jobs last month, and third-quarter GDP is set to rebound based on consumer movement data. Add to all that a positive contribution from net trade and a less negative drag from inventories then the case for a third consecutive 75bp Federal Reserve rate hike in September remains strong.”

In the meantime, the USD/CAD reacted downwards, plunging below 1.2800, further extending its losses, despite falling crude oil prices and the lack of Canadian economic data to be reported.

What to watch

An absent Canadian economic calendar would leave USD/CAD leaning on US data. The US docket will feature the Producer Price Index (PPI9 for July, alongside Initial Jobless Claims.

USD/CAD Price Analysis: Technical outlook

The USD/CAD extended its losses beyond the 20, 50, and 100-day EMAs, eyeing the 200-day EMA at 1.2739. Further accelerating its fall is the Relative Strength Index, crossing below the 50-midline and dropping under 42 readings, with some room to spare, before hitting oversold conditions. However, a break below the 200-DMA will expose the 1.2700 figure, followed by the June 10 daily low at 1.2680.