Dollar little changed by CPI awaiting FOMC

The US Labor Department reported on Wednesday that the Consumer Price Index (CPI) increased at a rate of 0.1% in July against economists’ prior forecasts of 0.2%. This is after rising by 0.3% in June. July’s number marks the sixth consecutive month of increases. Most notably, shelter costs helped push up the total number, offsetting declines in other categories.

The CPI data release prompted a moderate initial surge for the US dollar against most other major currencies as the markets waited in eager anticipation for this afternoon’s FOMC minutes from last month’s meeting. As always, traders and investors will be reading into these minutes very carefully to discern any nuanced suggestions as to the timing of a Fed liftoff.

Despite Wednesday’s inflation data coming out lower-than-expected, the increase that did occur could be sufficient, when coupled with a strengthening labor market, to give the Fed motivation to raise rates in September. Due to low oil and commodity prices as well as a strong dollar, however, inflation is likely to remain subdued, which could potentially prompt a slower pace of Fed tightening after the initial rate hike.

Shortly after the CPI data was released, USD/CAD rose as the US dollar strengthened and the Canadian dollar weakened when crude oil again fell under pressure after showing signs of stabilizing earlier in the day.

From a technical perspective, USD/CAD continues to show strong upside momentum within its sharp bullish trend that has been in place for the past three months. A combination of US dollar strength and persistently weak crude oil prices pressuring the Canadian dollar prompted the currency pair to hit and slightly exceed its 1.3200 target in early August, forming a new peak at 1.3212, a high not seen since September of 2004.

After reaching that peak, USD/CAD pulled back to dip below key psychological support at 1.3000 before rebounding. Currently range trading between 1.3200 resistance to the upside and 1.3000 support to the downside, the overall directional bias continues to be to the upside in line with the prevailing trend for both the US dollar and Canadian dollar.

With the US dollar continuing to be supported by rate hike anticipation and crude oil continuing to be pressured by persistent oversupply conditions and production levels, USD/CAD is likely poised to extend its sharp uptrend even further. With any sustained breakout above the 1.3200 resistance level, which would confirm a continuation of the entrenched bullish trend, the next major upside target is at the 1.3400 resistance level.