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Uptick in Canada Consumer Price Index (CPI) to Tame USD/CAD Strength

Trading the News: Canada Consumer Price Index (CPI)

Updates to Canada’s Consumer Price Index (CPI) may undermine the recent strength in USD/CAD as the headline reading for inflation is expected to uptick to 2.3% from 2.2% in May.

Image of DailyFX economic calendar

Signs of stronger price growth may encourage the Bank of Canada (BoC) to further normalize monetary policy in 2018 as the ‘Governing Council expects that higher interest rates will be warranted to keep inflation near target,’ and Governor Stephen Poloz & Co. may continue to strike a hawkish tone at the next meeting on September 5 as ‘CPI and the Bank’s core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.

In turn, a positive development may spark a bullish reaction in the Canadian dollar as it puts pressure on the central bank to implement higher borrowing-costs, but another below-forecast CPI reading may fuel a larger advance in USD/CAD as it curbs bets for an imminent BoC rate-hike. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

Impact that Canada CPI has had on USD/CAD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY

2018

06/22/2018 12:30:00 GMT

2.6%

2.2%

+48

-15

May 2018 Canada Consumer Price Index (CPI)

USD/CAD5-Minute Chart

Image of USDCAD 5 minute chart

Canada’s Consumer Price Index (CPI) held steady at 2.2% per annum for the second consecutive month in May, while a separate report showed Retail Sales contracting 1.2% in April amid forecasts for a flat print. A deeper look at the CPI revealed higher gasoline and transportation costs offset by discounted prices for clothing & footwear, with the cost of household operations also narrowing 0.9% in May.

The Canadian dollar struggled to hold its ground following the slew of dismal data prints, but the reaction was short-lived, with USD/CAD slipping back below the 1.3300 handle to end the day at 1.3261. Review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

USD/CAD Daily Chart

Image of USDCAD daily chart

  • Outlook for USD/CAD remains constructive following the failed attempts to close below the 1.3130 (61.8% retracement) zone, with the exchange rate at risk for a larger advance as it appears to be coming off of trendline support.
  • Break/close above the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region raising the risk for a run at the 2018-high (1.3386), with the next topside hurdle comes in around 1.3420 (78.6% retracement) to 1.3460 (61.8% retracement) followed by the 1.3540 (23.6% retracement) region.

Additional Trading Resources

New to the currency market? Want a better understanding of the different approaches for trading? Start by downloading and reviewing the DailyFX Beginners Guide.

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader series on how to effectively use leverage along with other best practices that any trader can follow.

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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