The Canadian dollar strengthened against the U.S. dollar on Tuesday as higher rent prices and mortgage interest costs led to higher-than-expected domestic inflation.

Canada's headline CPI rose 0.7 per cent month on month in April, pushing the annual rate to 4.4 per cent from 4.3 per cent previously, both notable increases above consensus expectations of three-tenths of a percentage point. Against this backdrop, the USD/CAD fell 0.4% to 1.3407 in early trade, falling back for a second straight session, indicating that bears may enter again.

The Bank of Canada recently stopped tightening policy after raising interest rates by 425 basis points since March 2022, but said it was a conditional pause depending on whether the inflation outlook met expectations. Last month's CPI figures probably fit that criteria.

In that case, the Bank of Canada could soon signal that it is ready to resume raising borrowing costs, or that it will maintain an aggressive stance for longer than the market discounts if consumer prices don't fall faster. Hawkish messages should boost the Canadian dollar.

Technical analysis of USD/CAD

Usd/CAD has breached its 200-day simple moving average, but needs to close below it to reinforce the bearish signal. If sellers succeed in pulling off this feat, we could soon see a retest of the 2023 lows. Further weakness will shift the focus down to 1.3225. On the other hand, if the bulls regain control of the market and trigger a reversal, initial resistance is at 1.3465 and then 1.3530.