**USD/CAD Inches Higher, Nears 1.3800 Ahead of US CPI Data Release**
*Original article by FXStreet, adapted and expanded for detail and clarity.*
The USD/CAD currency pair is showing signs of upward momentum, edging closer to the 1.3800 level in the days leading up to the much-anticipated U.S. Consumer Price Index (CPI) report. Traders and investors are closely watching movements in the pair, as inflationary pressure in the U.S. remains a key determinant for the Federal Reserve’s monetary policy direction. The result of the CPI release will likely influence the Fed’s rate hike trajectory and, by extension, impact USD strength relative to other currencies, including the Canadian dollar.
This article examines the upward movement of USD/CAD, the economic data fueling price action, institutional investor sentiment, oil market implications, and where technical indicators suggest the pair might be headed in the near term.
### USD/CAD Strengthens as CPI Release Looms
The USD/CAD pair saw modest gains during Monday’s trading session, climbing above the 1.3750 figure and inching toward the psychological resistance of 1.3800. The U.S. dollar’s advance was supported by growing expectations that consumer prices will remain elevated—forcing the Federal Reserve to stick with higher interest rates for longer than previously envisioned.
Market expectations ahead of the release predict that April’s CPI data will show:
– **Headline CPI**: Projected increase of 3.4% year-over-year, holding steady from March’s annual reading.
– **Core CPI**: Expected to decelerate marginally to 3.6% from 3.8% year-over-year.
A hotter-than-expected CPI could strengthen the U.S. dollar further, as markets would begin pricing in additional Fed hawkishness. Conversely, a downside surprise might invite speculation that the Fed is nearing or already at the peak of its tightening cycle.
### Key Drivers Supporting USD/CAD Upside Momentum
Several underlying factors have underpinned the greenback’s strength against the loonie in recent sessions. These include strong U.S. labor market data, elevated Treasury yields, weak oil prices, and diverging economic outlooks between the U.S. and Canada.
#### 1. Resilient U.S. Economic Indicators
Data released by the U.S. Bureau of Labor Statistics last week revealed:
– **Nonfarm Payrolls** surged by 253,000 in April, beating consensus estimates of 180,000.
– **Unemployment Rate** dipped to 3.4%, matching a 50-year low.
– **Wage growth** accelerated, with average hourly earnings rising 0.5% month-over-month.
This strong labor market performance reinforces the notion that inflation will remain sticky, compelling the Fed to maintain higher interest rates to cool demand.
#### 2. Elevated U.S. Treasury Yields
– The benchmark 10-year Treasury yield hovered around 4.5%, underscoring investor expectations of persistent inflation and reduced odds of Fed interest rate cuts in the near term.
– Short-term yields also surged ahead of the CPI release, adding incremental support to USD.
Higher yields tend to attract capital inflows to U.S. fixed-income assets, thereby strengthening the dollar.
#### 3. Sluggish Oil Prices and Canadian Dollar Weakness
The Canadian dollar has historically maintained a tight correlation with oil prices due to Canada’s status as a major crude exporter. Recent declines in oil markets have dampened CAD performance:
– West Texas Intermediate (WTI) crude fell below $78 per barrel, slipping more than 2% on concerns over slower global demand.
– Weak demand from China and persistent macroeconomic concerns globally have created downward pressure on commodity-linked currencies like the loonie.
This combination of soft oil demand and risk aversion in global markets has added to CAD’s underperformance against the greenback.
#### 4. Divergence Between the Federal Reserve
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