USD CAD slides on US CPI Canadian manufacturing sales

USD/CAD fell on Wednesday morning after a combination of data from the US and Canada prompted the US dollar to pare its previous gains and the Canadian dollar to strengthen.

The US Labor Department released Consumer Price Index (CPI) figures for August that unexpectedly fell for the first time since January, largely due to low oil and gasoline prices. This placed pressure on the US dollar, as any signal of disinflation may play a significant role in the Fed’s decision on whether or not to begin raising interest rates this week. The Fed is slated to begin its two-day meeting on Wednesday and issue a statement announcing its rate decision on Thursday. Coupled with recent global market volatility in the equity markets, the CPI figures may have the potential to create complications for an immediate rate hike, despite strength in unemployment and housing.

Simultaneously, Canadian manufacturing sales data was reported to have increased by 1.7% in July, substantially higher than previous consensus expectations of 1.1%. Furthermore, June’s sales increase was revised up from 1.2% to 1.5%. This positive economic news for Canada led to an initial surge for the Canadian dollar, which placed additional pressure on USD/CAD.

From a technical perspective, since hitting an 11-year high of 1.3352 in late August, USD/CAD has spent the past three weeks consolidating within a relatively tight trading range just below that long-term high. This consolidation has formed a clear triangle chart pattern around the key 1.3200 support/resistance level. Prior to this consolidation, the currency pair had been entrenched in a sharp uptrend that had been in place since mid-June.

Driving this uptrend for the past several months has been a combination of plunging crude oil prices, which is closely correlated with the Canadian dollar, and a strengthening US dollar that has continued to price-in expectations of an impending interest rate hike in the US.

While oil prices should continue to remain depressed due to persistent oversupply conditions and the US dollar should continue to be supported by expectations of a rate hike sometime in the near future, an impending USD/CAD pullback could be very likely, especially if the Fed fails to raise interest rates on Thursday.

Any sustained breakdown below the noted 1.3200 level and triangle pattern could result in a pullback towards the 1.3000 psychological support level, followed by major support at 1.2800.

In the opposite event of a Fed decision to raise rates on Thursday, any break above the triangle pattern should target immediate resistance around 1.3400, followed by the key 1.3600 resistance objective.