USD/CAD demonstrates volatility squeeze above 1.3100 ahead of Michigan Sentiment data

The USD/CAD pair is demonstrating signs of a squeeze in volatility above the immediate support of 1.3100 in the European session. The Loonie asset has turned choppy as the US Dollar Index (DXY) has found an intermediate support around 99.60.

S&P500 futures have recovered their entire losses and have turned positive in London, portraying a recovery in the risk appetite of the market participants.

The US Dollar Index (DXY) has gauged temporary support, however, the downside bias is still solid as investors are hoping that the Federal Reserve (Fed) will pause the policy-tightening spell after hiking interest rates by 25 basis points (bps) to 5.25-5.50% this month. Contrary to the USD Index, the 10-year US Treasury yields have rebounded to near 3.77%.

This week, June’s inflation report conveyed that price pressures grew at a nominal pace as a decline in prices of second-hand automobiles offset the marginal rise in gasoline prices. Core Consumer Price Index (CPI) also posted a nominal pace as demand for big-ticket items remained extremely weak. No doubt, at least one more interest rate hike by the Fed this year is in the pipeline, July’s interest rate hike can be skipped.

Going forward, preliminary Michigan’s Consumer Sentiment Index data (June) will be keenly watched. As per the consensus, the economic data is seen improved to 65.5 vs. the former release of 64.4.

On the Canadian Dollar front, the Bank of Canada (BoC) raised interest rates by 25 basis points (bps) to 5% this week. BoC Governor Tiff Macklem cited "Higher interest rates are needed to slow growth of demand in the economy and relieve price pressures."

Meanwhile, oil prices are expected to extend losses to near $76.00 as global central banks are preparing for a fresh interest rate hike cycle. It is worth noting that Canada is the leading exporter of oil to the United States and a decline in oil prices would impact the Canadian Dollar.