Canadian Dollar Drops Ahead of CPI Data on Greenback's Overall Strength

The Canadian dollar has fallen against its US counterpart, extending the losses since Tuesday, as the US dollar has rallied across the board, while the market expects the Friday data to show slowing inflation in Canada.

USD/CAD rose to 1.0964, its highest since 11 August, and just 24 pips away from the three-month high touched on 6 August.

Canada will release its July CPI data on Friday. Market consensus for the headline reading is 2.3% from a year earlier, slower than the June reading of 2.4%. Month-on-month, the prices are expected to fall 0.1% after having risen 0.1% in June.

However, the Bank of Canada core measure of consumer price inflation is expected to risen to 1.9% from 1.8%.

Canadian retail sales data for June is also due on Friday, and the expectations are for the sales growth to slow to 0.3% from 0.7%.

The FOMC minutes, scheduled at 18:00 GMT on Wednesday, will also be crucial for the pair. Then the market will look to the Jackson Hole event, where the Fed Chair Janet Yellen is likely to comment on the trajectory for the US interest rates.

The greenback has strengthened as the US housing market data released overnight surprised on the higher side and as consumer price inflation stayed near the target of 2%.

The US dollar rallied to a four-month high of 103.28 against the yen and an 11-month high of 1.3285 against the euro, on Wednesday.

The dollar index, the measure of greenback's strength against its major counterparts on a trade-weighted basis, jumped to 82.12, up 0.3% on the day, to its highest since September last year.

The index is up more than 0.85% over the past three days.

USD/CAD Outlook

The Canadian dollar had been showing some strength since the employment data on 8 August, which was, however, mixed.

The net change in employment was just an increase of 200 jobs, while the market was expecting an addition of 20,000. But the unemployment rate fell to 7% from 7.1%, beating the consensus for an unchanged print.

Other data which strengthened the loonie recently was the 11 August housing starts, which came in at 200,100 for July, higher than the previous month's 198,700 and the market consensus of 193,000.

The move helped the USD/CAD pair touch a two-week low of 1.0859 on 15 August, but since then, it has been on the rise.

Technically, the pair is now holding above the 50% Fibonacci retracement of the March-July selloff near 1.0950.

A daily close above that level will help it break through the 6 August peak of 1.0988, aiming the 61.8% retracement of 1.1025.

The pair will then eye 1.1120 and 1.1170 ahead of a retest of this year's high of 1.1280, touched on 20 March.

On the downside, immediate support is 1.0860 and then comes the barrier of 1.0810 ahead of 1.0775, the 23.6% level.

Then 1.0706 will be a level to watch ahead of the 3 July trough of 1.0618 which was a six-month low.