USD/CAD flattens as markets weigh US fresh tariff threats

• USD/CAD turns cautious ahead of Tuesday's inflation data for both the US and Canada.
• Traders digest the strong Canadian employment report from Friday and rising tariff threats from the US.
• The first psychological resistance for USD/CAD is seen at 1.3700.

The USD/CAD pair is trading flat on Monday as traders digest US tariff threats against the EU and Mexico and look ahead to the release of inflation data on Tuesday.

At the time of writing, the US Dollar is trading at around 1.3690 against the Canadian Dollar, with the recent 30% threat against goods imported to the US from the European Union and Mexico driving risk sentiment.

Markets remain cautious following reports of potential 35% tariffs on Canadian imports and a steep 50% levy on Copper shipments to the US, which poses a significant threat to one of Canada's key export sectors.

Despite the negative trade headlines, the Loonie found some support from Friday's better-than-expected employment report, which showed resilience in Canada's labor market.

This data has temporarily eased speculation that the Bank of Canada (BoC) might resume rate cuts at its upcoming policy meeting in July. Attention now shifts to Tuesday's Consumer Price Index (CPI) report from Statistics Canada, which will offer more clarity on inflation trends and the central bank's next move.

Simultaneously, the US will release its own inflation numbers on Tuesday, which are expected to show an annual increase of 3% in the core CPI figure in June.

A hotter US CPI print could strengthen the US Dollar by reviving expectations that the Federal Reserve may keep interest rates higher for longer, further complicating the outlook for the USD/CAD pair.

Technically, USD/CAD is currently retreating after failing to hold above the 78.6% Fibonacci retracement level of the September-February rally at 1.3713.

The pair is testing the 20-day Simple Moving Average (SMA) at 1.3670, while resistance remains firm at the 50-day SMA near 1.3745. Beyond that, the next upside targets are located at the June high of 1.3798 and the 1.3800 psychological level.

The Relative Strength Index (RSI) near 51 indicates neutral momentum, with price action still stuck in a sideways consolidation range.

USD/CAD daily chart

On the downside, a close below the 1.3670 mark could open the door to the June low at 1.3539 and possibly the September 2024 bottom at 1.3419, should bearish sentiment intensify.

Ultimately, Tuesday's inflation readings from both countries could be the deciding factor for the next directional breakout. A stronger Canadian CPI print would likely support the Loonie and drive USD/CAD lower.

Until then, traders should expect range-bound price action and volatility spikes as inflation data looms.