USD/CAD trades sideways below 1.4200 ahead of US inflation, BoC policy meeting

• USD/CAD trades in a limited range ahead of the US inflation data release and the BoC policy announcement.
• US core CPI is estimated to have grown steadily in November.
• The BoC is expected to cut interest rates by 50 bps to 3.25%.

The USD/CAD pair consolidates in a tight range below the round-level resistance of 1.4200 in the European trading session on Wednesday. The Loonie pair trades sideways as investors await the United States (US) Consumer Price Index (CPI) data for November and the Bank of Canada’s (BoC) monetary policy decision, which are scheduled for the North American session.

Ahead of the US inflation data, the US Dollar (USD) revisits the weekly high after extending the winning streak for the fourth trading day, with the US Dollar Index (DXY) advancing to near 106.70. Market sentiment is slightly cautious as the inflation data would influence expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18.

Monthly and annual headline inflation are estimated to have grown by 0.3% and 2.7%, respectively, faster than their former readings. The core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 0.3% and 3.3% on month and annually, respectively.

Signs of a slowdown in inflationary pressures could boost dovish Fed bets. On the contrary, hot figures could weaken the same. According to a Reuters poll, 90% of economists expect that there will be a 25-basis points (bps) interest rate reduction by the Fed next week.

Meanwhile, the Canadian Dollar (CAD) will be influenced by the BoC’s policy meeting in which the central bank is expected to cut interest rates again by 50 bps to 3.25%. This would be the second consecutive outsize interest rate reduction by the BoC as it also cut its key borrowing rates by 50 bps in the October meeting and the fifth in a row. The BoC has already reduced its interest rates by 125 bps this year.