By Ketki Saxena
Investing.com - The Canadian dollar posted its biggest decline in 11 months vs. its US counterpart on Tuesday as hotter than expected U.S. CPI data sent treasury yields surging, dramatically lowered expectations of a Fed rate cut in May, and turned sentiment in equities firmly risk off.
U.S. CPI rose 3.1% on an annual basis in January, compared with the expectations for a 2.9% increase. Following the release of the reading, market expectations for a Fed rate cut in May fell to roughly 33%, from 58% before the data release.
"USD-CAD moved sharply higher today as part of a broader cross-asset response to stronger-than-expected U.S. inflation data, which caused the market to push out expectations for the first Fed rate cut," noted George Davis, chief technical strategist at RBC (TSX:RY) Capital Markets.
Looking ahead for the pair, the big question is whether the Bank of Canada will be forced to cut rates before the Fed.
The Canadian economy has not been able to withstand the strain of higher interest rates as well as the U.S. economy - something that could force the Bank of Canada to cut rates sooner than the Fed.
Adam Button, Chief Currency analyst at ForexLive notes that “If Canada cuts and the US keeps rates high – [that would] open up wider rate differentials. That's something that could re calibrate USD/CAD higher and lead to a challenge of the 2023 highs near 1.3875.
Up next for the pair, impetus is likely to come from U.S. Retail Sales this week, with the Canadian economic docket lacking any high impact releases.
On a technical level for the pair, analysts at FXStreet note, “Tuesday’s bull run in the USD/CAD has the pair breaking into the top side of the 200-day Simple Moving Average (SMA) near 1.3477.”
“The trick for buyers will be to keep the pair from slumping back into a rough consolidation range below 1.3550. On the bottom end, the 50-day SMA near 1.3417 will provide a near-term technical floor."