Lower inflation and higher oil prices strengthen the Canadian dollar

20 July 2023 201
Lower inflation and higher oil prices strengthen the Canadian dollar

The USD/CAD currency pair resumed its decline amid positive economic statistics in Canada. Last week, the central bank of Canada raised the interest rate to 5%, as analysts expected. The regulator did not pause even though inflation dynamics were positive.

The price growth slowed more than expected again this week. Analysts' forecasts suggested a decline in annual inflation to 3% year-on-year. The core index was expected to rise to 0.5% against May. In fact, the annual consumer price index fell to 2.8%, and core inflation was in the negative zone of -0.1%.

Thus, the combination of higher interest rates and lower price growth gives the Canadian dollar a chance to strengthen.

In addition, U.S. inflation is also declining. The latest retail sales data indicate a slowdown in the economy. Historically, a period of rate cuts has a negative impact on the U.S. dollar. Now there are more signals that the policy easing cycle is just about to begin.

Increasing oil prices also support the Canadian dollar. The prices were able to break out of a two-month flat trend.

Global oil demand will hit a record high of 102.1 million barrels per day this year. This forecast was published by the International Energy Agency (IEA).

According to the IEA, 70% of the increase in demand will come from China. This will be driven by the country’s growing use of petrochemical products. However, the widely expected recovery of China's economy is not yet happening fast enough.

Besides, a separate IEA report shows that investment in fossil fuels will increase by more than 6% to about $950 billion in 2023.

However, oil will be less used as a fuel after 2026, and demand for it will slow down in the near future.

Based on the technical analysis, the USD/CAD currency pair broke down from the pennant pattern a couple of months ago, and now there is an impulsive movement. Fundamental drivers also signal the continued strengthening of the Canadian dollar.

The downside target will be the support and round level of 1.300. A Stop-loss will be set at the update of the last days' highs, which corresponds to the price of 1.325.

USDCAD is likely to decline:

Take profit – 1.300

Stop-loss – 1.325

This content is for informational purposes only and is not intended to be investing advice.

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