USD/CAD Analysis: Bulls turn cautious ahead of BoC decision, Powell’s testimony

• Resurgent USD demand assisted USD/CAD to gain strong positive traction on Tuesday.
• Stronger US CPI prints reaffirmed hawkish Fed expectations and underpinned the USD.
• A strong pickup in oil prices benefitted the loonie and kept a lid on any further gains.
• Investors turned cautious ahead of the BoC policy decision and Powell’s testimony.

The USD/CAD pair caught some aggressive bids on Tuesday and pushed through the 1.2500 psychological mark amid a strong pickup in the US dollar demand. Worries about the economic fallout from the spread of the highly contagious Delta variant of the coronavirus continued acting as a tailwind for the safe-haven greenback. Apart from this, expectations that the Fed will tighten its monetary policy sooner than anticipated provided an additional boost to the already stronger USD. The market speculations were reinforced by hotter-than-expected US consumer inflation figures for June.

In fact, the headline CPI smashed market expectations and climbed 0.9% in June – marking the largest rise since June 2008. The rate of inflation in the 12 months that ended in June jumped to 5.4% from 5% previous. Another closely watched measure of inflation that omits volatile food and energy prices – core CPI – also rose 0.9% during the reported month and the yearly rate stood at a 29-year high level of 4.5%. Inflation has been trending higher every month since January and showed no signs of slowing yet, raising doubts if the spike in prices will subside as quickly as the Fed predicts.

The continuous rise in the cost of living in the US forced investors to bring forward rate hike expectations to late 2020, which triggered a sharp spike in the US Treasury bond yields. This was seen as another factor that underpinned the greenback, which, in turn, pushed the pair higher. That said, a goodish pickup in crude oil prices extended some support to the commodity-linked loonie and capped gains. The black gold advanced to one-week tops after the International Energy Agency (IEA) warned of a deepening supply crunch amid a deadlock among members of the OPEC+ alliance.

Meanwhile, a stalemate over whether to revive the Iranian nuclear deal has reduced the threat of an additional supply into the global markets. Adding to this, the American Petroleum Institute said that crude inventories in the US fell by more than 4 million barrels last week. This would be an eighth straight weekly draw, the longest run of declines since January 2018, if confirmed by government figures later on Wednesday. Nevertheless, the pair ended just a few pips below the top end of its daily trading range and consolidated in a range through the Asian session on Wednesday.

Investors now seemed reluctant to place any aggressive bets, rather prefered to wait on the sidelines ahead of the key event risks. The Bank of Canada (BoC) is scheduled to announce its latest monetary policy update later during the early North American session. This will be followed by the post-meeting press conference, which, along with oil price dynamics will influence the Canadian dollar. Traders will further take cues from Fed Chair Jerome Powell's semi-annual congressional testimony. Powell's remarks should influence market expectations about the Fed's near-term monetary policy outlook, which, in turn, should drive the USD in the near term and provide a fresh directional impetus to the major.

Short-term technical outlook

From a technical perspective, the overnight strong move up pushed the pair beyond a resistance marked by the top end of a near one-week-old descending trend-line. This followed by acceptance above the 1.2500 mark favours bullish traders. Hence, a subsequent move back towards monthly tops, around the 1.2590 region, remains a distinct possibility. Some follow-through buying beyond the 1.2600 mark will reaffirm the near-term positive outlook and push the pair further towards April swing highs, around the 1.2650-55 region. The momentum could further get extended and allow bulls to aim back to reclaim the 1.2700 mark for the first time since March.

On the flip side, any meaningful slide below the 1.2500 mark might be seen as a buying opportunity. This should help limit the downside near the descending trend-channel resistance breakpoint, which coincides with the 1.2450-40 horizontal support. The latter also marks the 200-hour SMA and should now act as a key pivotal point for short-term traders. Sustained weakness below will negate any near-term positive bias and prompt some aggressive technical selling. The pair might then turn vulnerable to break weaken further below the 1.2400 mark and retest monthly swing lows, around the 1.2310-1.2300 region.