USD/CAD pair rallied strongly after a knee-jerk reaction near 1.3783 at the start of the European session. The asset is targeting a daily high around 1.3830 as the overall risk profile is extremely negative ahead of the US inflation data. US 10-year Treasury yields have recouped some of their losses after falling to around 3.9%. The powerful US Dollar Index (DXY) has also intercepted bids after falling to around 113.00 but lacks confidence in the recovery move. It would be worth seeing if the asset will reach a fresh weekly high of 113.60.

This week’s big event will be the US Consumer Price Index (CPI) data, to be released on Thursday. Preliminary estimates suggest headline inflation will fall to 8.1% due to weak gasoline prices. However, the core CPI, which excludes oil and food prices, is released at 6.5%, higher than the previous data of 6.3%. But before that, the release of the Federal Reserve (Fed) minutes will be closely watched. The minutes will also include the views of all Federal Reserve policymakers on interest rate targets to achieve price stability.

In return, the Federal Reserve could stick with its existing approach to fighting inflation as the central bank pursues tightening policies, and the Federal Open Market Committee (FOMC) could implement another 75bp rate hike at the next rate. The November 2 decision, as the Summary Economic Projections (SEP) reflect a steeper path for US interest rates The Bank of Canada (BoC) as central bank has yet to show interest in tightening policy in and it remains to be seen if governor Tiff Macklem and the company will change future guidance at the next meeting on October 26th as the Board is due to release the updated Monetary Policy Report (MPR).

Until then, developments outside of the US could keep USDCAD afloat as FOMC shows no signs of slowing down in its up cycle and further exchange rate appreciation could add to the retail sentiment slope. Not like the behaviour seen earlier this year.