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The Canadian Dollar (CAD) experienced a modest appreciation on Tuesday, gaining ground against the US Dollar (USD) as softer-than-expected US Producer Price Index (PPI) data eased market concerns about inflationary pressures.
US PPI Data Eases Market Tensions
The December PPI data revealed a slower-than-anticipated acceleration in inflation. Headline PPI rose by 0.2% month-over-month, falling short of the 0.3% expected by economists. Core PPI, which excludes volatile food and energy prices, remained unchanged, significantly below the anticipated 0.3% increase.
These softer-than-expected readings provided some relief to market participants, raising hopes that the upcoming US Consumer Price Index (CPI) data may also come in below expectations. However, it’s important to note that underlying inflationary pressures remain elevated, with annual core PPI rising to 3.5% from 3.4%.
Canada-US Interest Rate Differential Remains a Key Driver
The Canadian Dollar continues to be influenced by the diverging monetary policy paths of the Bank of Canada (BoC) and the Federal Reserve (Fed). The BoC is expected to continue its rate-cutting cycle, while the Fed is anticipated to maintain a more cautious stance, holding off on further rate cuts in the near term. This widening interest rate differential between the two countries provides some support for the Canadian Dollar.
Limited Canadian Data Limits Upside Potential
The Canadian Dollar’s gains were limited by a lack of significant economic data releases from Canada this week. With only low-tier data on the horizon, the Canadian Dollar’s near-term movement is likely to be primarily driven by external factors, such as the US economic data and the evolving global risk sentiment.
Technical Factors: Consolidation Phase for the Canadian Dollar
The USD/CAD pair has been trading in a relatively tight range, reflecting a lack of strong directional momentum. Technical indicators suggest that the pair may be entering a period of consolidation. While the Canadian Dollar has shown some recent strength, it faces resistance near the 1.4400 level.
