The dollar index (DXY) has been rising moderately since the opening of today's trading day. As of writing, DXY futures were trading near the 102.16 mark, 22 points above the closing price of yesterday's trading day. In general, dollar's downward dynamics remains, and a new range of about 400 pips has formed on the DXY chart, with boundaries passing through the 105.50 and 101.47 marks. Given the market's expectations that the Fed will once again slow down its interest rate hike at the meeting on January 31 and February 1, and may hint at further movement in this direction, which ultimately does not exclude the possibility of a transition from a tough policy to a soft one, the most likely is a breakdown of the lower limit of this range and further decline towards the 100.00 psychologically important mark.
In an alternative scenario, the Fed will continue to increase the interest rate without slowing down: one way or another, inflation in the U.S. is still significantly and many times higher than the Fed's 2% target level. This is, as Fed officials, including its Chairman Jerome Powell, have repeatedly stated, an unacceptable level of inflation for the U.S. central bank and, in this sense, one of the main tools to contain it is an interest rate hike. As follows from the minutes of the December meeting, Fed officials believe that disruptions in the global supply chain and increased inflation risks will persist for at least another year.
Today, the focus of market participants will be the publication (at 13:30 GMT) of the latest data on inflation in Canada.
The core consumer price index (CPI) is expected to decline in December, while the core CPI (excluding fruits, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco) rose (+0.1 % and +6.1% in annual terms against the values of 0% and +5.8% in the previous month).
With the Bank of Canada's inflation target being in the 1%–3% range, a rise above that range is a precursor to a rate hike and positive for the CAD. If the expected reading is worse than the previous one, it will be negative for the CAD. Data better than previous values will strengthen the Canadian dollar.
From the technical point of view, USD/CAD is developing an upward trend in the long-term bull market zone, i.e., above the key support levels 1.2970, 1.3250 and 1.3345. As of writing, the pair traded near the 1.3432 mark, which is an important short-term resistance level. Its breakdown will be the first signal to build up long positions.