The Canadian Dollar (CAD) has taken a hit, plunging to familiar multi-year lows last seen during the pandemic. This drop has pushed USD/CAD above the 1.4400 handle, keeping the Loonie at its weakest bids in years. As the trading week ends, the lack of significant economic data leaves traders focused on the widening interest rate differential between Canada and the U.S., fueled by hopes for Federal Reserve (Fed) rate cuts.
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CAD Hits Long-Term Lows: Key Highlights
- The Canadian Dollar lost nearly 0.4% against the U.S. Dollar on Friday, marking a significant drop.
- Excluding the pandemic, these are the weakest levels for the CAD since early 2016.
- With no major economic reports on Friday, the Loonie remained vulnerable to broader market flows.
- Next week’s market activity is expected to be volatile due to a U.S. holiday and the inauguration of a new U.S. president on Monday.
Upcoming Data: Canada’s CPI in Focus
Canada is set to release its latest Consumer Price Index (CPI) figures next Tuesday. Analysts predict headline inflation will continue to decline, with forecasts suggesting a drop from 1.9% to 1.7% for the year ending December.
If inflation falls further below the Bank of Canada’s (BoC) target, expectations for BoC rate cuts will grow stronger. This will further widen the interest rate differential between the BoC and the Fed, potentially weakening the CAD even more.
Daily Market Movers: Why the Canadian Dollar Fell
- Broader Market Trends: With limited data releases on Friday, the CAD was heavily influenced by global market flows.
- Interest Rate Dynamics: The widening gap between the Fed and BoC’s monetary policies is putting downward pressure on the Canadian Dollar.
- Lack of Supportive Data: The absence of significant economic updates left the Loonie without any catalysts for recovery.
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USD/CAD Price Forecast: Brace for a Breakout
As the Loonie tests multi-year lows, USD/CAD traders should prepare for a potential breakout. While the pair has been consolidating in a near-term range, the release of key Canadian inflation data next week could spark a new trend.
If CPI figures confirm a further decline in inflation, the CAD could face additional selling pressure, pushing USD/CAD to fresh highs. However, traders should also be cautious of choppy flows early next week due to the U.S. holiday and global market uncertainties.
Conclusion
The Canadian Dollar’s recent slump underscores its vulnerability to global market dynamics and widening interest rate differentials. With key inflation data on the horizon, traders should remain vigilant, as the USD/CAD pair could break out of its consolidation phase and hit new highs.
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