• Canadian inflation data met forecasts of 2.7%, easing from the previous month.

• There is a 55% chance the BoC will cut rates in June.

• Fed policymakers have remained cautious despite easing inflation.

The USD/CAD forecast looks bullish, driven by a weakening Canadian dollar following inflation figures that matched expectations. Simultaneously, the US dollar was steady after Fed policymakers dampened hopes for rate cuts.

On Tuesday, Canadian inflation data met forecasts of 2.7%, easing from the previous month. Similarly, core measures declined, giving investors more confidence that the Bank of Canada will cut rates at its June meeting. Before the report, there was a 40% likelihood of a cut in June. However, after the inflation figures, it rose to 56%. Consequently, the Canadian dollar plunged.

The Bank of Canada is getting closer to its rate-cutting cycle as Canada’s economy slows down and prices ease. Analysts believe the central bank is ready to cut at least three times before the Fed. However, after three cuts, the outlook becomes unclear since a weaker currency could increase inflationary pressure.

Meanwhile, despite a decline in inflation in April, policymakers have remained cautious in the US. This has led to a drop in Fed rate-cut expectations and boosted the dollar. Fed officials are finding it had to make such a sudden shift from hawkish to dovish. There is still little confidence that the lower inflation will continue. Therefore, they might wait for more evidence before taking a more dovish stance. Still, the divergence in policy outlooks will likely keep the Canadian dollar weak. This weakness will increase when the Bank of Canada starts cutting interest rates.

USD/CAD key events today

• Fed policy meeting minutes.

USD/CAD technical forecast: Bulls take charge but face solid resistance above

On the technical side, the USD/CAD price attempts to stay above the 1.3650 resistance level after respecting the 30-SMA support. Bulls recently triggered a shift in sentiment when the price respected the 1.3600 key psychological level. The price confirmed the change when it broke above and retested the 30-SMA. At the same time, the RSI broke above 50 and now trades in bullish territory.

Bulls must now make a higher high to confirm a new bullish trend. However, the new trend might not go far because of the strong resistance trendline above. This trendline has caused reversals before and could do it again.

https://www.forexcrunch.com/blog/2024/05/22/usd-cad-forecast-canadian-dollar-tumbles-on-cooling-inflation/