**USD/CAD Rises as Weak Canadian CPI and Strong U.S. Dollar Weigh on the Loonie**
*Based on the original article by FXStreet’s Christian Borjon Valencia, expanded and supplemented with additional insights.*
The U.S. dollar continues to maintain its strength against the Canadian dollar, with the USD/CAD currency pair moving upward due to a combination of soft Canadian inflation data and robust performance from the U.S. economy. On November 17, 2023, the USD/CAD pair climbed as market sentiment turned bearish on the Canadian dollar (loonie) amid fresh macroeconomic data that pointed to weaker-than-expected inflation in Canada.
At the same time, recent data and central bank commentary in the United States have helped to keep the greenback supported. As market participants reassess the interest rate outlooks in both countries, the divergence in economic performance is becoming more pronounced, causing further momentum in the pair’s bullish trend.
This article analyzes the key factors behind the USD/CAD surge, including the latest economic indicators from Canada and the United States, the policy stances of the Bank of Canada (BoC) and the Federal Reserve (Fed), price action in forex markets, and projections for the pair going forward.
## Key Drivers of USD/CAD Movement
### 1. Soft Canadian Consumer Price Index (CPI) Data
Recent inflation data from Statistics Canada revealed that the country’s economy is cooling at a quicker pace than some economists had forecast. The weaker CPI figures suggest that the Bank of Canada may be closer to halting further interest rate hikes, and possibly initiating cuts earlier in 2024.
– **CPI figures for October:** Canada’s headline inflation came in at 3.1% year-over-year (YoY), matching expectations but falling from the previous reading of 3.8%. On the month-over-month (MoM) basis, inflation held flat at 0.1%.
– **Core inflation weakening:** The BoC’s preferred metrics — median and trim core CPI — also moderated. The median CPI dropped to 3.6% annually, down from 3.8% previously, while trim CPI slipped to 3.5% from 3.7%.
– **Implication for rates:** These figures indicate diminishing price pressures in the Canadian economy, strengthening the narrative that the BoC may not have to pursue additional rate hikes.
With inflation falling faster than anticipated, markets are increasingly pricing in that the central bank may begin cutting interest rates as early as mid-2024. This undercuts demand for the loonie as investors shift capital to currencies backed by more hawkish central banks.
### 2. U.S. Economic Data Supports U.S. Dollar Strength
On the U.S. side of the border, data releases have continued to paint a picture of a resilient economy. This fuels expectations that the Federal Reserve will maintain tighter monetary policy for longer, bolstering the greenback.
– **Retail Sales (October):** U.S. retail sales fell 0.1%, better than the consensus estimate of a -0.3% decline, signaling continued consumer spending strength.
– **Producer Price Index (PPI):** The PPI printed below expectations, showing cooling inflation at the wholesale level, yet the U.S. economy still looks stronger than its Canadian counterpart.
– **Labor market resilience:** Although job openings have declined slightly, the U.S. labor market remains tight, reinforcing Fed Chair Jerome Powell’s recent comments that the central bank must remain vigilant on inflation.
– **Fed rate policy outlook:** Fed officials, including Cleveland Fed President Loretta Mester and Fed Governor Lisa Cook, have expressed caution about easing policy too soon. Many Fed watchers now see the central bank keeping rates elevated into the second half of 2024.
These contrasts between Canada’s declining inflation and the U.S.’s economic resilience have created a divergence dynamic that favors the U.S. dollar.
### 3. Technical View and
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