USD/CAD slides below 1.4000 as Canadian inflation accelerate, US Dollar retreats

• USD/CAD drops sharply below 1.4000 as Canadian inflation grew faster than expected in October.
• Higher-than-expected Canadian inflation data might weigh on BoC large rate cuts prospects for December.
• The US Dollar falls back despite dismal market sentiment amid geopolitical tensions.

The USD/CAD pair falls sharply after the release of the hotter-than-expected Canadian Consumer Price Index (CPI) report for October. The CPI report showed that the headline inflation accelerated to 2%, faster than expectations of 1.9% and from 1.6% in September on year. Month-on-month headline inflation rose by 0.4%, the same pace at which price pressures decelerated in the previous month. Economists expected the monthly headline CPI to grow by 0.3%.

Faster-than-expected growth in inflationary pressures would weigh on market expectations for a second consecutive larger-than-usual interest rate cut of 50 basis points (bps) by the Bank of Canada (BoC) in the December meeting. However, the BoC might continue its policy-easing spell as the central bank is worried about a higher jobless rate. Canada’s Unemployment Rate was recorded at 6.5% in October, much higher than what is needed to maintain a full employment environment.

Meanwhile, dismal market sentiment due to a fresh escalation in the Russia-Ukraine war has strengthened the appeal of safe-haven assets. S&P 500 futures have posted significant losses in the North American session.

The war situation between Russia and Ukraine renewed after President Vladimir Putin’s approval of updating the nuclear doctrine, a move followed by the launch of United States (US) made and supplied ballistic missiles by Ukraine deep in their territory.

Moscow warned that the approval of US President Joe Biden for launching long-range missiles in the Russian region is unacceptable and could lead to a third world war.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back after failing to extend recovery above the key resistance of 106.70. Going forward, the US Dollar (USD) will be influenced by market expectations for the Federal Reserve’s (Fed) monetary policy action in the December meeting. Trades are slightly confident that the Fed will cut interest rates by 25 bps to 4.25%-4.50% next month, according to the CME FedWatch tool.

(The story was corrected at 14:15 GMT to say in the second bullet that "Higher-than-expected Canadian inflation data might weigh on BoC large rate cuts prospects for December, not US inflation)