The USD/CAD pair is trading higher around 1.3790 in the early European trading session on Friday. The Canadian pair rose as the US Dollar (USD) regained strength after being rocked by weak US Consumer Price Index (CPI) data for November.
At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading higher near 98.60.
As measured by the Consumer Price Index, headline inflation in the United States surprisingly fell to 2.7% year-on-year on Thursday from 3% in October. Economists expect inflation data to come in higher at 3.1%. The core reading, which excludes volatile foodstuffs and energy, slowed to 2.6% from estimates and the previous reading of 3%.
Meanwhile, the Canadian Dollar (CAD) is trading cautiously ahead of October retail sales data, which will be published at 13:30 GMT. Retail sales data is expected to remain flat on a monthly basis after contracting by 0.7% in September.
Technical analysis of the USD/CAD pair
The USD/CAD pair is trading slightly higher, approaching 1.3790 on Friday. The pair is holding below the bearish 20-day Exponential Moving Average (EMA), keeping the short-term bias tilted to the downside with the retracement remaining below the average. Steady contraction in the EMA underscores the continued supply on the rise. The 14-day RSI is at 35.09, near oversold territory after a modest bounce from the extremes seen last week, while momentum remains fragile.
A sustainable recovery will require a daily close above the 20-day EMA to ease downward pressure that could increase the odds of an upward move towards the 1.3900 ring figure. Until then, the pessimistic setup continues and could be strengthened if the spot price breaks the August 7 low at 1.3720.
(The technical analysis for this story was written with the help of an artificial intelligence tool.)
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a large number of other countries where it is traded alongside local banknotes. It is the world’s most traded currency, accounting for more than 88% of total global forex trading volume, or an average of $6.6 trillion in transactions per day, according to 2022 data. After World War II, the US dollar took the place of the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971 when the gold standard disappeared.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve. The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, which helps the value of the US dollar. When the inflation rate falls below 2% or when the unemployment rate is very high, the Fed may cut interest rates, which affects the dollar.
In extreme cases, the Fed could also print more dollars and activate quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used when credit dries up because banks will not lend to each other (due to fear of the counterparty defaulting). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It has been the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy U.S. government bonds mostly from financial institutions. Quantitative easing usually leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding in new purchases. It is usually positive for the US dollar.
