USD/CAD Targets 1.31 on Hawkish US CPI Report for August

It was a busy start to the US session for the USD/CAD, with the US CPI report drawing plenty of interest.

Ahead of today’s numbers, monetary policy divergence in favor of the greenback had fallen. The Bank of Canada 75-basis rate hike and talk of more hikes balanced the scales.

The better-than-expected numbers delivered some uncertainty on what lies ahead. The August US CPI report supports more hawkish rate hikes beyond a ‘priced in’ 75-basis point hike next week.

In August, the US annual rate of inflation softened from 8.5% to 8.3%, while the core annual rate of inflation accelerated from 5.9% to 6.3%. Economists forecast inflation rates of 8.1% and 6.1%, respectively.

According to the U.S Bureau of Labor Statistics,

• The food index increased by 11.4% over 12 months, the largest 12-month increase since May 1979.
• However, energy price pressures eased. The energy index increased by 23.8% for the 12 months ending August, down from 32.9% in the period ending July.
• Month-over-month, the food index increased 0.8% in August, the smallest monthly increase since December 2021.
• Energy prices fell by 5.0% after a 4.6% fall in July.
• In August, core consumer prices increased by 0.6%, with consumer prices up 0.1%. Both headline numbers beat forecasts.

USD/CAD Price Action

At the time of writing, the USD/CAD was up 0.61% to 1.30652. A mixed start to the day saw the USD/CAD pair fall to a low of 1.29538 before striking a high of 1.30673.

The USD/CAD broke through the First Major Resistance Level (R1) at 1.3033.

Technical Indicators

The USD/CAD will need to avoid R1 and the 1.2998 pivot to target the Second Major Resistance Level (R2) at 1.3080 and resistance at 1.31. However, market risk sentiment will need to deteriorate materially to support a return to 1.31. US economic data came in better than forecast, supporting the USD/CAD breakout.

In case of a ‘risk-off’-fueled extended rally, the USD/CAD should test the Third Major Resistance Level (R3) at 1.3161

A fall through R1 and the pivot would bring the First Major Support Level (S1) at $1.2952 into play. Barring a risk-on-fueled rally, the USD/CAD should avoid the Second Major Support Level (S2) at 1.2917. The Third Major Support Level (S3) sits at 1.2835.

Looking at the EMAs and the 4-hourly candlestick chart (below), it is a bullish signal. This morning, the USD/CAD pair sat above the 50-day EMA, currently at 1.30611.

The 50-day EMA flattened on the 100-day EMA, with the 100-day EMA shallowing on the 200-day EMA, delivering neutral signals for the USD/CAD pair. A hold above the 50-day EMA would support a breakout from R2 (1.3080) to bring 1.31 into view.

However, a fallback through the 50-day EMA would bring the 100-day EMA (1.30429) and R1 into play. The USD/CAD should avoid the 200-day EMA (1.29967) and S1 (1.2952).