USD/CAD bears are taking on bulls at key support

• USD is on the backfoot following a miss in US CPI data.
• USD/CAD bears testing the commitments in the daily support structure.

USD/CAD is trading at 1.2495 and down nearly 0.2% at the time of writing as it attempts to correct from the lows of the day marked down at 1.2489 so far. 

The US dollar is weaker which sent the pair lower from a high 1.2548 at the start of the day.

The US dollar's DXY index dropped against a basket of major currencies after data showed US consumer price increases slowed in July.

Investors were quick to take profits as they weighed the impact of US inflation data on the Federal Reserve's policy outlook.

The dollar index DXY, which measures the greenback against a basket of other major currencies, was down 0.22% at 92.865 and near to the lows of 92.801 in mid-day trade. 

Earlier, it hit 93.195, the highest since April 1, and not far off of its 2021 high of 93.439.

US yields also sank, with the 10-year falling from a high of 1.3760% to a low of 1.3030%.

Subsequent to the fall in the greenback, the CAD was able to add to its recovery from a near two-week low the day before.

The consumer price index increased 0.5% last month after climbing 0.9% in June, the Labor Department said.

In the 12 months through July, the CPI advanced 5.4%. Excluding the volatile food and energy components, the CPI rose 0.3% after increasing 0.9% in June.

Economists polled by Reuters had forecast overall CPI would rise 0.5% and core CPI 0.4%.

While still historically high, this easing in US inflation will have taken some pressure off the Federal Reserve in regard to the timing of tapering its asset purchases.

In any case, most Fed members believe any inflation pressures will be transitory and owing only to the pent up demand following months of COVID-19 lockdowns, resulting in higher consumption and spending.

The Jackson Hole on the 26th - 28th comes around the same time as the PCE, the Fed's preferred inflation measure which is due for release on the 27th.

If that data surprises on the upside then there is still the potential for a taper announcement during the event, although most unlikely. 

Instead, the Fed might prefer to see if there is any momentum in the labour market considering last Friday's report that could be compared to next month's employment report.

if there is a lack of positive confluence in the data, then a taper could well be put off towards the end of the year to allow for more evidence to come through in terms of data that indicates the economy is on track. 

The wild card on all of this is the delta variant. 

The Fed would be inclined to remain patient and cautious in the event of an adverse turn in the situation. 

In addition to the weakness in the greenback, the US Senate has passed President Biden's infrastructure package and thus boosted market expectations of demand for commodities.

Oil prices got a lift on the news which tends to correlate to the CAD. WTI is higher by 1.12% and rallied from a low of $66.69 to a high of $69.42. 

USD/CAD technical analysis

The bears will need to break support as the prior lows near 1.2475 which will open prospects of a downside continuation if the same area holds as new resistance. 

On the other hand, should the US dollar and yields firm up again, the path of least resistance could well be on a break of the current resistance near 1.2600, in line with the prevailing bullish trend: