USD/CAD erases earlier gains and dives below 1.3400 after Canada’s GDP

• Inflation in the United States continues to fall, as the ECI showed, sparking talks about a Fed pivot.
• Canada’s economy stalled and grew at a 0.1% pace in December.
• USD/CAD Price Analysis: It would likely extend its downtrend and test the 200-day EMA.

The USD/CAD retreated on Tuesday, as the US Dollar (USD), extended its losses following a report by the US Department of Labor (DoL), which showed that employment costs cooled down. At the same time, Canada’s economy grew as expected. Therefore, the USD/CAD is trading at 1.3319 after hitting a daily high of 1.3471.

The US Dollar continued its downtrend, weighed by the US Employment Cost Index (ECI), which measures workers’ compensation, decelerated after printing 1.2%, resting at 1%, below estimates of 1.1%. After the data was released, the greenback slashed some of its earlier gains against most G8 currencies, particularly the Loonie (CAD). Speculations arise that the US Federal Reserve (Fed) could pause after February and March’s meetings, as another inflation gauge revealed last week data showed the inflation downtrend extended to four straight months. Meanwhile, financial analysts estimate the US Fed would end lifting rates once they hit the 4.75% to 5% peak.

At the same time, Statistics Canada revealed that the economy in December grew at a 0.1% pace, unchanged compared to November’s data. On an annual basis, the Gross Domestic Product (GDP) likely gained 1.6% in Q4. If the flash estimate proves correct, the economy will expand by 3.8% in 2022 from the previous year, above the central bank’s 3.6% forecast.

Reflecting on the abovementioned, the USD/CAD dropped from around daily highs and extended its losses towards 1.3340, while the US Dollar Index, a gauge for measurement of the buck’s value vs. six peers, slides 0.13%, clings above 102.00 for the second day in a row.

Ahead of the week, the US economic docket will feature the S&P Global and ISM Manufacturing PMIs and the US Federal Reserve’s (Fed) decision. If the Fed sounds dovish, that would likely weaken the USD/CAD pair, which could extend its losses below 1.3300.

The USD/CAD, Tuesday’s candle, shows that the trading range has been wide throughout the session. Even though the pair reclaimed the 20 and 50-day Exponential Moving Averages (EMAs), each at 1.3406 and 1.3457, dropped sharply beneath both, and formed a candle with a considerable up-wick, suggesting that sellers are in charge. Therefore, the USD/CAD first support would be the YTD low at 1.3300, followed by the 200-day EMA at 1.3255, before sliding towards the psychological 1.3200 mark. On the other hand, if USD/CAD buyers reclaimed 1.3400, a test of the 100-day EMA is on the cards.