Investing.com – The Canadian dollar weakened against its U.S. counterpart on Tuesday, weighed down by uncertain risk sentiment ahead of key U.S. and Canadian economic data.
One of the major drivers for the pair this week will be the U.S. personal consumption expenditures price index for January, due on Thursday. Traders will be closely watching the U.S. Federal Reserve’s preferred measure of inflation to further gauge when the Fed will cut rates.
Thursday will also see the release of Canadian Q4 GDP data, a key data point the Bank of Canada will use to guide its rate cut trajectory and timeline. Expectations are for an annualized increase of 0.8% in the quarter.
In recent weeks, the Canadian dollar has come under pressure from weak economic data, and a cooler than expected CPI release, which have served to bring forward bets of a rate cut from the Bank of Canada to April.
Meanwhile, markets have pushed back expectations of a rate cut from the Fed to June, which has sent the U.S. dollar broadly higher.
Commerzbank (ETR:CBKG) analyst Michael Pfister, however, notes that markets may be overpricing chances of an early rate cut from the BoC, which is likely to support the Loonie as the Fed moves to rate cut.
"With the very low level of US inflation, the Fed will probably cut interest rates, weighing on the US dollar," Pfister notes. "On the other hand, the BoC is likely to stick to its cautious approach and start cutting rates a bit later."
Commerzbank forecasts the USD/CAD exchange rate at 1.33 by mid-year and 1.03 by year-end.
Looking ahead for the pair on a technical level, analysts at FXStreet note that “The immediate technical barrier of February’s high of 1.3586 remains a key level for bulls to break through to challenge the 1.3600 handle.”
“A rising pattern of higher lows on the daily candles provides technical support for immediate bullish momentum, but price action is trading into a heavy supply zone from 1.3500 to 1.3550.”