USD/CAD Trades Cautiously Ahead of Key US PCE Inflation and Canadian GDP Data

In the European trading session on Friday, the USD/CAD currency pair is exhibiting caution as it hovers below the critical psychological resistance level of 1.3500. Despite a slight decline in the US Dollar (USD), the Canadian Dollar (CAD) remains marginally higher, indicating potential weakness ahead of the upcoming Canadian GDP data for July, which is set to be released at 12:30 GMT.

Economists predict that the Canadian economy experienced minimal growth of just 0.1% in July, following a stagnant performance in June. This sluggish growth has led to expectations that the Bank of Canada (BoC) may continue its policy-easing cycle, driven by a deceleration in inflation and a weakening labor market.

Simultaneously, market participants are keenly awaiting the United States Personal Consumption Expenditures (PCE) price index data for August. The core PCE inflation, which is the Federal Reserve’s (Fed) preferred measure, is projected to rise by 2.7% year-on-year, an increase from 2.6% in July. This inflation data is crucial as it will significantly impact the Fed's interest rate outlook for the remainder of the year.

Currently, financial analysts anticipate that the Fed may implement a cumulative reduction of 75 basis points in interest rates during the remaining two policy meetings of the year, contingent on the inflation data.

The USD/CAD pair is at a critical juncture, trading just above the immediate support level of 1.3400. A recent swing low near this level suggests a bearish trend, with technical indicators such as the 20 and 50-day Exponential Moving Averages (EMAs) indicating potential further downside. The 14-day Relative Strength Index (RSI) has shifted into the 20.00-60.00 range from a previous 40.00-80.00, suggesting that any pullbacks may be viewed as selling opportunities by traders.

Should the USD/CAD pair break below the support level of 1.3400, it could expose the currency to further declines, targeting the January 31 low of 1.3360 and the June 9 low of 1.3340. Conversely, if the pair manages to recover above the psychological resistance of 1.3500, it could rally towards the April 5 low of 1.3540, followed by the September 20 high of 1.3590.