USD/CAD slipped 0.08% on Wednesday to about 1.4180 after hitting 1.4155 following US inflation data, then pared losses as markets reassessed the Federal Reserve’s tightening path. The annual PCE Price Index held at 3.4% in August, below a 3.7% expectation, while July was revised down to 3.4% from 3.7%. Core PCE was unchanged at 3% year on year versus a 3.3% forecast, and July was revised to 3% from 3.3%; month on month, headline PCE rose 0.3% and core PCE increased 0.2%.
The inflation surprise landed alongside firmer activity data. ADP said US private payrolls rose 90K in September versus 70K expected, and August was revised to 36K, while second-quarter annualised GDP was revised up to 2.2% from 1.5%, compared with expectations for 1.5%, indicating growth accelerated from 2.1% in Q1. CME FedWatch put October hike odds at about 37%, down from nearly 51% on Tuesday and 71% a week earlier, as DXY fell 0.21% to around 101.20 after a 101.03 low; December hike odds rose to 57.5% from 49.4%. On charts, USD/CAD was at 1.4176, above the 100-period SMA at 1.4165 and the 200-period SMA at 1.4106, with RSI (14) near 42; resistance sits around 1.4200, while support levels include 1.4175, 1.4150, 1.4133, 1.4106/1.4100, then 1.4025, 1.3974 and 1.3945.
Options Strategies for Consolidation and Resistance Breakouts
We advise derivative traders to capitalize on the current consolidation of the USD/CAD pair around 1.4180 by utilizing range-bound options strategies. The recent dip to 1.4155, sparked by the softer-than-expected August PCE inflation of 3.4%, has quickly found a floor due to resilient US economic growth. Given this quick recovery, we suggest looking at short-term bull call spreads to position for an imminent breakout above the key 1.4200 resistance level.
While the drop in October rate hike expectations to 37% initially weakened the Greenback, the robust GDP revision to 2.2% and strong ADP private payrolls of 90,000 show the US economy is far from stalling. Historically, when growth indicators remain strong despite cooling inflation, the US dollar tends to experience shallow retracements followed by sustained rallies. Because of this, we believe the shift in rate hike expectations to December—which now stands at a 57.5% probability—will keep the downside limited.
Technical Levels, Macro Backdrop, and Trade Recommendations
For options traders, we recommend selling out-of-the-money put options near the key technical support of 1.4100 to collect premium while the pair consolidates. With the 100-period and 200-period simple moving averages at 1.4165 and 1.4106 acting as solid safety nets, the technical setup strongly favors the bulls. If USD/CAD breaks cleanly above 1.4200 in the coming weeks, long call options targeting the 1.4300 range could yield highly profitable returns.
We can look at similar macro backdrops, such as the late 2023 Fed pause cycles, where strong jobs data consistently rescued the US Dollar from inflation-driven selloffs. Furthermore, with the Bank of Canada maintaining a more dovish policy stance relative to the Federal Reserve, the monetary policy divergence should continue to push this pair upward. Derivative traders should use any temporary dips toward 1.4133 as prime buying opportunities for long-dated call options.
