USD/CAD Draws Back from Fresh Yearly High Ahead of US PCE Report.

USD/CAD

USD/CAD sharply reverses from a fresh yearly high (1.3833); however, an increase in the US Personal Consumption Expenditure (PCE) Price Index may maintain the exchange rate as the Federal Reserve chases a restrictive policy.

The recent rally in USD/CAD appears to be stalling following the clearing of the July 2020 hike (1.3646). This is due to the reverse in the Relative Strength Index (RSI) from an extreme reading, with the move below 70 in the oscillator raising the scope for a more significant pullback in the exchange rate as a textbook sell signal takes shape.

However, the update to the US PCE may produce a bullish reaction in the USD as the core reading. The Fed’s preferred gauge for inflation per annum is expected to increase to 4.7% in August from 4.6% the month prior.

The Federal Open Market Committee (FOMC) may be forced to maintain its approach to tackling inflation by signs of constant price growth as the central bank chases a restrictive policy.

The USD may persistently stay ahead of the CAD due to the reflection of a steeper path for the Fed Fund rate by the Summary of Economic Projections (SEP). Furthermore, USD/CAD may show a bullish trend for the rest of the year as the Bank of Canada (BoC) seems to be on track to implement smaller rate hikes in the subsequent months.

The BoC might be encouraged to wind down its hiking cycle by the recent slowdown in Canada’s Consumer Price Index (CPI). This is because officials expect the economy to regularize in the second half of this year.

Until Governor Tiff Macklem and Co’s meeting on October 26, where the central bank is expected to release the updated Monetary Policy Report (MPR), developments coming out of the US may influence USD/CAD.

Market participants calculate the probability of another 75bp Fed rate hike. Still, a further advance in the exchange rate may fuel the tilt in retail sentiment like the behavior shown earlier this year.

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