Fed and BoC are forming basis for USDCAD decline

The USDCAD currency pair stabilized near a 3-week high as investors await the release of important US inflation data. These data may shed light on a potential interest rate cut by the Federal Reserve (Fed) at the upcoming meeting.

Traders are focused on today's US Consumer Price Index (CPI) and tomorrow's Producer Price Index (PPI). According to a poll by Reuters, economists forecast a 0.2% month-on-month increase in CPI for August. A rise of 2.6% year-on-year is expected, down from 2.9% in July.

After the release of a mixed employment report for August, the probability of a 50-basis-point rate cut briefly exceeded 50%, but then fell to 35%, according to the CME FedWatch Tool.

Meanwhile, Bank of Canada (BoC) Governor Tiff Macklem said at the Canada-UK Chamber of Commerce in London that a slowdown in globalization may not result in lower prices for goods in the world market. This, in turn, may increase inflation.

As Macklem noted, the BoC is willing to consider larger interest rate cuts if economic growth proves to be lower than expected. Last week, the central bank cut the core rate by 25 basis points to 4.25%, which was the third cut since June. This caused the Canadian currency to weaken, but the market has already partially taken it into account.

On the technical level, the USDCAD currency pair is forming an upward correction on the H4 timeframe. In terms of wave analysis, the price is forming the second ascending wave. However, the divergence of the Stochastic Oscillator (with its standard settings) signals a potential reversal of the rate downward and the beginning of the third descending wave.

Signal:

The short-term outlook for USDCAD suggests selling. 

The target is at the level of 1.3440.

Part of the profit should be taken near the level of 1.3510.

A stop-loss could be placed at the level of 1.3710.

The bearish trend is short-term, so trade volume should not exceed 2% of your balance.