• CAD is strong on US dollar weakness following CPI miss.
• The price is correcting into prior support with the 38.2% Fibonacci not far off. 
• Bears eye 1.32 the figure as a downside initial swing target. 

The Canadian Dollar strengthened on Thursday, hitting the best level against the greenback since September 20th. The moves were inspired by lower-than-expected inflation reading for the US in the day's Consumer Price Index data. This has increased bets the Fed will raise rates by a smaller 50bps next month.

The greenback fell sharply as the data pointed to underlying inflation has peaked. CPI rose 0.4% in October to match the prior month's increase, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%. Excluding volatile food and energy, core CPI increased 0.3% month-over-month after gaining 0.6% in September. the markets reacted in such a manner that this might allow the Federal Reserve to ease up on aggressively hiking interest rates.  Money markets see a 70% chance that the central bank would hike its benchmark rate by 25 basis points rather than 50 basis points at its next policy decision on Dec. 7, up from about 50% before the US inflation data.

Meanwhile, in Canada, CPI figures are due next week. This brings the Bank of Canada to the fore. The BoC lifted rates by 50 bps on October 26th, a sixth consecutive rate hike. However, this was below a 100bps hike in July and a 75bps increase in September. Still, the central bank is expected to tighten further and raise rates by another 50bps in December as the inflation remains elevated. BoC Governor Tiff Macklem spoke before the Public Policy Forum today. He said the Canadian economy is in excess demand while inflation is too high. However, he added that wage growth ''now looks to be plateauing''. 

Update:

BoC's Governor Macklem: ''As for the next rate announcement, it might be another larger-than-usual step or a return to the more routine 25 basis point range.''

Markets might have jumped the gun on CPI

While this is deemed to be good news for the Fed, central bank watchers will now have a series of other data to monitor leading up to the next meetings, primarily with a focus on the Fed. We will get one more jobs report and another set of inflation and Retail Sales data before the December 13-14 meeting. Fed's Cleveland President Loretta Mester spoke in recent trade and commented on the CPI data. She said, ''this morning’s October CPI report also suggests some easing in overall and core inflation,'' but added, “there continue to be some upside risks to the inflation forecast.” This type of rhetoric will guide the market to think that even when Fed policy rates peak, that they are likely to remain higher for longer. This could be significantly bullish for the greenback over the horizon of today's CPI data. Additionally, Fed's Daly spoke and said that there is no evidence of wage prices spiralling and that inflation is one of the most lagging variables, adding, the Fed needs ''policy to be sufficiently restrictive until see inflation is well on its way to 2%.''

USD/CAD and US Dollar technical analysis

Nevertheless, as the following analysis will show, the US dollar is under pressure and could be headed for more of a clearout across its major counterparts.

The US dollar, as measured by the DXY, is taking out a key trendline support and the impulse carries momentum. This puts the support at 107.80 in view. In such a followthrough, the CAD will set to gain ground but a micro correction is in play at the time of writing: 

The price is correcting into prior support with the 38.2% Fibonacci not far off. Nevertheless, with continued headwinds for the greenback, for the meanwhile at least, there are going to be prospects of a downside continuation. Measuring the geometry of the recent range between 1.3570 and the prior lows of 1.3390, a 50% expansion meets close to the -0.618% Fibonacci around 1.32 the figure as a downside initial swing target.