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Canadian Dollar Retreats on Souring Market Sentiment Ahead of US CPI

The Canadian Dollar (CAD) is shedding Monday’s gains on Tuesday as a shift towards risk-off sentiment boosts the US Dollar. Equity markets are declining, and investor attention is focused on Wednesday’s release of the crucial US Consumer Price Index (CPI) data.

US Inflation Data: Catalyst for CAD Movement

Expectations for the CPI report are mixed. Headline inflation is anticipated to increase due to higher energy prices, while core inflation (which excludes volatile food and energy) is expected to have slowed but remain significantly above the Fed’s 2% target. An upside surprise in the inflation figures could trigger a risk-averse reaction, potentially driving the Loonie (CAD) lower.

Bank of Canada Policy Decision: Focus on Rate Cut Signals

Shortly after the CPI release, the Bank of Canada (BoC) will announce its monetary policy decision. While no changes to the benchmark interest rate are expected, last week’s soft inflation and employment data could prompt the BoC to signal a potential rate cut, likely in June, adding further pressure on the CAD.

Technical Outlook: USD/CAD Uptrend Remains, Eyes Key Resistance

After rebounding from the 1.3555 support area (which aligns with the US Dollar Index support at 193.90), the USD/CAD pair exhibits renewed bullish potential. Pre-CPI risk aversion supports the safe-haven US Dollar.

The broader uptrend remains intact, with the potential for a retest of the 1.3645 trendline resistance. A successful break above that level opens the door to the 1.3680-1.3700 range. Significant support levels lie at 1.3555 (confluence of 4-hour 50 and 100 SMA), 1.3480, and 1.3415.