Canadian dollar takes pause, CPI next

The Canadian dollar is flat in Tuesday trading. In the North American session, USD/CAD is trading at 1.2065, down 0.02% on the day. Although it has been a quiet day, USD/CAD touched a new multi-year low earlier on Tuesday, falling to 1.2013. A break below the 1.20 line would have psychological significance and could provide the Canadian dollar with further momentum.

Canada inflation next

Canada releases inflation data for April on Tuesday (12:30 GMT). In the US, CPI outperformed in April, pushing the US dollar briefly higher. We could see a similar situation in Canada, with headline CPI (YoY) expected to jump to 3.2%, which would be sharply higher than the 2.2% gain in March. A strong reading could result in the Canadian dollar resume its move towards the symbolic 1.20 level.

Fed remains dovish despite higher US inflation

The surge in consumer inflation sent the dollar higher last week and has led to speculation that the Fed may have to reexamine its ultra-accommodative monetary policy. Fed member Robert Kaplan made headlines when he urged the Fed to start to discuss tapering its USD120 billion per month in asset purchases sooner rather than later. Still, Kaplan is clearly in the minority,  and the Fed line remains that any inflation surge is temporary and there are no plans to taper QE anytime soon.

The Fed has long held that it would allow inflation to temporarily run above its target of 2 per cent. The key question is whether the April CPI numbers are a one-time blip or has inflation risen to a sustainable higher level. The market reaction to the CPI report was sharp, with equities falling and the US dollar gaining strength. If the next CPI release also points to stronger inflation, this could reignite speculation about the Fed tightening policy.

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       USD/CAD Technical

• USD/CAD faces resistance at 1.2190 and 1.2275
• The pair is testing support at 1.2034. Below, there is support at 1.1963

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