USD/CAD holds steady as Fed path and BoC divergence loom

• US CPI misses estimates, Fed outlook to define short-term USD/CAD trajectory.
• USD/CAD tests key inflection zone below psychological resistance.
• The Loonie pair monitors economic outlook as domestic headwinds mount.

USD/CAD is poised at a critical juncture following the release of April's US Consumer Price Index (CPI), which delivered a mild downside surprise across key inflation components. With several high-profile Federal Reserve (Fed) speeches still ahead this week, the pair's near-term trajectory may be shaped by evolving rate expectations and diverging policy signals between the Fed and the Bank of Canada (BoC).

At the time of writing, the US Dollar (USD) is trading around 1.3998, up 0.17% against the Canadian Dollar (CAD), as the Loonie remains under pressure amid rising focus on relative policy divergence and commodity-linked headwinds.

US Inflation softens in April, bolstering the case for Fed rate cuts

The April US CPI report revealed a clear moderation in inflation pressures. 

Headline CPI rose by 0.2% (MoM), falling short of the 0.3% consensus and rebounding from a -0.1% decline in March. 

On a YoY basis, headline inflation slowed to 2.3%, also missing expectations of 2.4%. Core CPI, which strips out food and energy, rose by 0.2% (MoM), below the 0.3% estimate, though marginally above the 0.1% reading from the prior month. 

On an annual basis, core CPI remained stable at 2.8%, in line with forecasts.

The softer-than-expected inflation data has increased the probability of Fed policy easing later this year, with markets now assigning a higher likelihood of the first rate cut occurring in September, according to CME FedWatch. However, CPI is just one piece of the puzzle. The broader macroeconomic narrative now turns to incoming Fed communications, labor market data, and global trade risks, which will further clarify the central bank's policy path.

Fed speakers and BoC uncertainty add layers to USD/CAD dynamics

Traders will be closely watching remarks from Fed officials Christopher Waller, Philip Jefferson, and Mary C. Daly on Wednesday, followed by a critical speech from Chair Jerome Powell on Thursday.

These comments will offer fresh insights into whether the Fed views the recent disinflation trend as sufficient to warrant rate cuts or whether a more cautious approach will prevail.

Meanwhile, the Bank of Canada faces its own domestic challenges. With inflation trending lower and economic growth losing momentum, nearly 60% of analysts now anticipate a BoC rate cut at its next meeting.

The widening policy gap between the Fed and BoC is emerging as a central theme for USD/CAD traders, and could amplify directional moves in the coming weeks.

Oil prices, another crucial variable for the Canadian Dollar, remain volatile amid concerns over global demand and geopolitical disruptions. As a major exporter, Canada's economic outlook and currency are highly sensitive to swings in crude, making energy market trends another key component of USD/CAD volatility.

USD/CAD struggles at key resistance as technical indicators signal pivotal inflection point

The USD/CAD pair recently attempted to advance beyond the key psychological threshold of 1.4000 but was unable to maintain momentum above the 200-day Simple Moving Average (SMA), which currently stands at 1.4020. This inability to break higher is underscored by the long upper shadow on Tuesday's candlestick, reflecting a pronounced rejection by sellers at elevated levels.

Consequently, the pair has retreated below 1.4000, reaffirming the 200-day SMA as a significant resistance barrier. At the same time, the 61.8% Fibonacci retracement level, measured from the September 2024 low to the February 2025 high, is offering immediate support near 1.3940. The confluence of resistance and support within the 1.3940 to 1.4000 range is shaping a critical technical inflection zone.

USD/CAD daily chart

The Relative Strength Index (RSI), presently at 54.00, indicates modest bullish momentum without signaling overbought conditions, implying that directional bias may depend on forthcoming fundamental or technical catalysts. Should the pair decisively break below 1.3940, it may invite increased selling pressure, potentially triggering a move toward the November 2024 low at 1.3823 and extending further to the 78.6% Fibonacci retracement level at 1.3714.

Conversely, a firm daily close above the 200-day SMA would likely shift sentiment in favor of the bulls, opening the path toward the 50% retracement level at 1.4106, with a possible continuation toward the April high around 1.4415.