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Loonie chart analysis before printing the data -by Ecork

USD/CAD analysis

  • Crucial inflation data for April may set the scene for the yen-dollar
  • The main technical levels for the USD/CAD pair are considered after the rebound of the major resistance area

Crucial inflation data may provide a short-term pullback

As we turn to one of the most anticipated US CPI publications in recent months, it makes sense to assess the potential short-term reactions that may follow. Headline inflation – the price of a typical basket of goods and services including volatile items such as food and fuel – has been tactfully above expectations since it rose above 2% in April of last year.

Indeed, since then we have not yet seen a single instance where headline inflation printed below the expected value, due to supply chain shortages exacerbated by the invasion of Ukraine, and also mass printing of money in line with accommodative monetary policy.

In contrast, core inflation – a measure of inflation excluding volatile items such as food and fuel – had two records of inflation with the actual number falling short of expectations. It was such an occasion in last month’s edition that a 0.1% loss in core inflation sent the dollar down significantly in the 30 minutes that followed the print.

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Under this lens, we consider dollar pairs for the possibility of dollar weakness in the short term. We should mention ahead of time that even if core and factor inflation come in lower than expected, the long-term trend of a strong dollar, higher inflation and (US) interest rate hikes is still well established for now.

Core inflation is likely to attract a closer look from interested market participants to see if inflation’s grip on the broader economy is beginning to loosen. Therefore, the USD/CAD pair makes for an interesting setup if we see a core inflation rate of less than 6%.

Key technical levels for the USD/CAD pair

Looking at the USD/CAD pair, it is no secret that the US dollar has been hot, buoyed by the initial safe-haven allure of the Ukraine invasion, which is now underpinned by the Fed rate-raising cycle. Earlier in the day, we saw what could be described as the market facing a potential drop in inflation data as the USD/CAD pair reversed off the upper side of its resistance zone at 1.3030.

A break below 1.2960 may lead to an impulsive move to 1.2895. The RSI appears to have turned lower shortly after breaking through the oversold territory, although we have seen bearish reversals from similar levels on the RSI in the past. One of the primary factors that could challenge the longevity of the potential move is the fact that oil prices have eased recently as concerns about global demand appear to outweigh supply concerns regarding the EU’s proposal to ban all Russian oil.

Resistance is currently at 1.3030 but could move to 1.2960 if we see a bearish move in the USD/CAD after inflation picks up.

USD/CAD daily chart

USD/CAD Preset: Loonie Chart Analysis Before Data Print

Source: TradingView, prepared by Richard Snow

USD/CAD Weekly Chart Openr records the importance of the resistance area (the blue rectangle) as it coincides with the previous resistance at 1.2960 and the 38.2% Fibonacci level of the main move in March 2020 to the downside.

USD/CAD weekly chart

USD/CAD Preset: Loonie Chart Analysis Before Data Print

Source: TradingView, prepared by Richard Snow

Written by Richard Snow for DailyFX.com

Connect with Richard and follow him on Twitter: Tweet embednowFX

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