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USD/CAD tested and rejected 1.2700 following stronger than expected consumer prices. Over the past month, we’ve seen mostly softer Canadian data including retail sales which dropped -0.8% at the end of the year. Economists were looking for softer demand but they did not anticipate sales falling by the largest amount in a one month period since March 2016. However like the Eurozone, Canada’s economy is coming from a strong base and the CPI report suggests that the healthy labor market is driving up price pressures. Core consumer prices, which are less volatile increased for the fourth month in a row and is now at its highest level since September 2016. This will keep pressure on the Bank of Canada to tighten. In the week ahead, Canada’s current account balance and GDP reports are scheduled for release.

Technically, 1.2700 is an important level as it’s where USD/CAD broke down from in December and where the 200-day SMA hovers. USD/CAD has some support at the 100-day SMA near 1.2620 and once that’s broken, we could see a deeper slide down to 1.25. If USD/CAD finds its way back above 1.2725, we could see a stronger rally to 1.28.