A slowdown in Canadian inflation will push USDCAD to 1.3655

The USDCAD currency pair continues to recover the positions lost during August. Last week the sellers tried to seize the initiative, but their efforts were enough for only one trading session. The quotes are also supported by the uptrend line from the six-month low of 1.344. Bulls should consolidate above the level of 1.362, which may be followed by price movement to 1.3655. This development is favored by the news released yesterday.

On Tuesday, the Canadian statistical authorities presented the inflation data for August. In the last month of summer, the rate of price growth finally reached the Bank of Canada's target of 2%, down 0.5% from July. Such a value exceeded analysts' forecasts of 2.2% and was the lowest since the beginning of 2021. The core inflation rate, which excludes the most volatile components, fell to 2.4% from 2.7% and also exceeded economists' expectations of 2.5%.

Commenting on the published statistics, Carolyn Rogers, deputy governor of the Bank of Canada, noted good progress in the fight against excessive price increases. Although the official isn’t yet ready to declare victory over inflation, the balance of risks in the Canadian economy has changed noticeably. Now representatives of the regulator are much more concerned about a strong slowdown in GDP growth and the expansion of unemployment. Under such conditions, the central bank may be forced to ease monetary policy more aggressively.

Citigroup analysts in the new report expressed their opinion on impending monetary policy easing by the Bank of Canada by 0.5% at the next meeting on October 23. According to experts of the bank, this decision will be made regardless of today's verdict of the Fed. Royce Mendes from Desjardins Group believes that the Canadian regulator should reach the neutral range of interest rates of 2.25-3.25% as soon as possible. This could happen as early as the end of this year if the half-percent step is chosen in both October and December.

If the Fed's stance isn’t excessively soft, the USDCAD pair will have good chances to continue its growth to the levels of 1.362 and 1.3655.

The following trading strategy can be suggested:

Buy USDCAD at the current price. Take profit 1 — 1.362. Take profit 2 — 1.3655. Stop loss — 1.355.