USD/CAD defends 1.3600 as US Dollar recovers ahead of US Inflation and Fed policy

• USD/CAD has managed to pick bids above the crucial support of 1.3600.
• A decline in United States inflation will set the stage for a slowdown in the interest rate hike by the Federal Reserve.
• The Bank of Canada is ready to hike interest rates further if it fails to see signs of a slowdown in inflation.
• USD/CAD is expected to display a sheer move as the RSI (14) is hinting at a volatility contraction.

USD/CAD has attempted a recovery after dropping marginally below the crucial support of 1.3620 in the early European session. The Lonnie asset is aiming to conquer the immediate resistance of 1.3640 as the US Dollar Index (DXY) has recovered sharply as the market mood has turned cautious again ahead of the United States inflation and the outcome of the Federal Reserve (Fed) policy.

The US Dollar Index (DXY) has recovered sharply after a corrective move below the round-level support of 105.00. The USD Index has accelerated its recovery to near 105.06 and is expected to remain volatile ahead. Investors are confused about whether to underpin the risk-aversion theme as the Federal Reserve is set to hike its interest rate peak guidance in its monetary policy meeting on Wednesday or to support the risk appetite theme due to lower consensus for the United States Consumer Price Index (CPI) data.

Meanwhile, S&P500 futures are displaying a marginal fall in early London after posting solid gains on Monday. The 10-year US Treasury yields are hovering around the critical resistance of 3.60%, displaying obscurity in the market mood.

Upbeat US PPI and lower annual inflation expectations trim inflation consensus

Market participants have got anxious ahead of the release of the US inflation. Price pressures have remained the talk of the town this year as the sentiment of the households remained dented and the Federal Reserve policymakers remained worried thinking about the consequences of a higher price rise index.

A surprise drop in November’s Producer Price Index (PPI) report and one-year consumer inflation expectations is hinting at a slowdown in the current inflation rate. The headline PPI dropped to 7.4% as producers are worried about a decline in consumer spending. While one-year consumer inflation expectations have declined to 5.2% in November from 5.9% in October, marking the biggest one-month decline on record.

This has led to a decline in the consensus for headline inflation to 7.4% vs. the former release of 7.7%. While the core CPI is expected to trim to 6.1% against 6.4% reported earlier. Analysts at JP Morgan Chase & Co. have cited that a soft reading in US CPI data could spark a powerful rally in US equities. The 500-stock basket of the United States could rally up to 10% if headline inflation drops to 6.9% or lower, as reported by Bloomberg.

Lower inflation to cement a slowdown in Federal Reserve’s interest rate hike pace

Mounting inflation pressures have been forcing the Federal Reserve to tighten the interest rate policy despite the accelerating risks of a recession. The agenda of the Federal Reserve chair Jerome Powell has been the achievement of price stability. Signs of deceleration in the inflationary pressures will set the stage for a slowdown in the policy tightening pace by the Federal Reserve.

The risk of higher interest rate peak guidance for CY2023 as the inflation rate will remain beyond the targeted rate of 2% for a while. Rabobank analysts said they expect the US central bank to hike the policy rate by 50 basis points (bps) and see policymakers revising the terminal rate projection to the neighborhood of 5%.

BOC Governor seems on foot to hike rates further if fails to dwindle inflation

The speech from Bank of Canada (BOC) Governor Tiff Macklem on Monday cleared that the Canadian central bank won’t think twice about hiking interest rates further if inflation remains stubborn ahead. While speaking to business leaders in Vancouver, the Bank of Canada Governor said that policy tightening has begun to work but would take time to feed the economy. The present challenge in front of the Bank of Canada is that higher interest rates could push the economy into an unnecessarily painful recession, as reported by Reuters.

USD/CAD technical outlook

USD/CAD has dropped after facing barricades around the supply zone placed in a narrow range of 1.3690-1.3700 on an hourly scale. On a broader note, the 20-period Exponential Moving Average (EMA) at 1.3640 is overlapping with the Loonie asset price, which indicates a sideways auction profile.

Meanwhile, the Relative Strength Index (RSI) (14) is oscillating in a 40.00-60.00 range, which indicates a consolidation ahead till the release of a potential trigger.