USD/CAD keeps on falling on divergent market pricing: focus on Canada CPI and US NFP now

KEY POINTS:

• USD/CAD is approaching a key swing level at 1.3725
• The BoC shifted to a stronger neutral stance, but didn’t validate rate hike bets
• The Fed delivered on expectations, but Powell sounded more dovish
• Focus on Canada CPI, US NFP and US CPI

FUNDAMENTAL
OVERVIEW

USD:

The USD has been weakening
across the board since last week’s FOMC decision. The Fed delivered on
expectations cutting by 25 bps and signalling a higher bar for further rate
cuts, but Fed Chair Powell’s press conference was seen as fairly dovish.

In fact, instead of
sounding as neutral as possible and stressing data-dependency, he downplayed
the inflation risk and emphasized the labour market weakness, suggesting that
there’s more tolerance for higher inflation than for weaker labour market.

The focus this week will be
on the US NFP and CPI reports that will wrap up the last real trading week of
the year before market participants prepare for the holidays. Right now, the
market is pricing 57 bps of easing by the end of 2026.

If we get strong US data,
especially on the labour market side, we will likely see a hawkish repricing
which would give the US dollar a boost. On the other hand, weak data should
weigh on the greenback further as the market will bring rate cut bets forward.

CAD:

On the CAD side, the BoC
last week held interest rates steady but didn’t validate the market’s rate hike
bets just yet. In fact, the central bank kept a cautious tone and highlighted
the weak details in the recent GDP and employment reports despite acknowledging
the improvements. The market is still fully pricing a rate hike by the end of
2026. Today, we get the latest Canadian inflation report.

The most important data to
watch will be the underlying inflation measure, that is the Trimmed Mean CPI
Y/Y, which is expected at 2.9% vs 3.0% prior. If we get a lower-than-expected
figure, we will likely see some CAD weakness as traders could pare back a bit
the rate hike bets. On the other hand, if the data surprises to the upside (the
bigger the surprise, the stronger the reaction), we should see CAD strength as
the market will likely bring forward rate hike expectations.

USDCAD TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that after breaking the major trendline on a blockbuster Canadian
employment report, the USDCAD pair extended the drop into 3-month lows. We are
now close to the key swing level around 1.3725.

That’s where we can expect
the buyers to step in with a defined risk below the level to position for a
rally into the 1.39 handle. The sellers, on the other hand, will want to see
the price breaking lower to increase the bearish bets into the 1.3550 level next.

USDCAD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see that we have a downward trendline defining the bearish momentum. If we get
a pullback into the trendline, we can expect the sellers to lean on it with a
defined risk above it to position for a drop into new lows. The buyers, on the
other hand, will look for a break above the trendline to pile in for a rally
into the 1.39 handle next.

USDCAD TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, we can
see that we have a minor support around the 1.3754 level. The buyers will
likely continue to step in there with a defined risk below the support to
target a pullback into the trendline. The sellers, on the other hand, will look
for a break lower to pile in for a drop into the September lows around the
1.3725 level. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Today we get the Canadian CPI data. Tomorrow, we have the US NFP report.
On Thursday, we get the US CPI data.