By Ketki Saxena
Investing.com -- The Canadian dollar edged higher against its U.S. today, inching back towards a recent 10-month high as the greenback continued to weaken and despite cooling inflation - which Scotiabank (TSX:BNS) notes may pose a tailwind for the loonie in the short term as it reduces pressure on the Bank of Canada.
Inflation figures for June revealed an annual rate drop to 2.8%, marking a 27-month low and falling below economists' projections of 3%. Additionally, separate reports showed an impressive surge in Canadian housing starts by 41% compared to May - the most significant increase witnessed over the past decade.
Analysts at Scotiabank have noted, that "Lower inflation may weigh a bit more on the CAD in the short run but policymakers have been clear that progress beyond 3% is expected to be harder to come by. This will not be any sort of ‘all clear’ signal."
Despite cooling inflation, market reactions were relatively muted regarding potential interest rate hikes from the Bank of Canada. Post-data analysis saw money markets factoring in a reduced probability (22%) for a September rate hike, down from prior estimates of 25% before the inflation data release.
The loonie found further support from rising oil prices as anticipated declines in U.S production outweighing softer-than-predicted Chinese economic indicators.
Meanwhile, the US dollar faced headwinds due to underwhelming economic performance including less-than-expected Industrial Production data and Retail Sales figures that fell short of estimates.
On a technival level for the pair, analysts at FX Street note, "The USD/CAD remains tilted to the downside, set to test initially the June 27 daily low of 1.3116 after USD/CAD sellers claimed the 1.3200 figure. IF USD/CAD drops below 1.3150, the next stop would be the June 27 low, followed by the YTD low of 1.3092."
"Conversely, if USD/CAD buyers reclaim 1.3200, that will expose the 20-day Exponential Moving Average (EMA) at 1.3237, followed by the 1.3250 psychological level."