USD/CAD finds demand below 1.3430 as hawkish Fed bets remain solid despite US CPI cools

The USD/CAD pair has sensed buying interest after defending the crucial support of 1.3430 in the early European session. The Loonie asset is looking to extend its recovery above the immediate resistance of 1.3437. The major has grabbed the attention of responsive buyers after a recovery move in the US Dollar Index (DXY). The USD Index has rebounded after building a firm base around weekly lows at 101.44 as hawkish Federal Reserve (Fed) bets are full of strength despite softening of United States inflation as expected by the market participants.

S&P500 futures have turned positive after negating bearish cues inspired by renewed fears of the US recession, portraying a recovery in the risk appetite of the market participants. US equities faces pressure on Wednesday and settled weak after Federal Open Market Committee (FOMC) minutes confirmed that the economy will face a mild recession later this year. It is highly likely that tight credit conditions by US commercial banks after the banking collapse and higher rates from the Federal Reserve will push the economy into recession.

Meanwhile, the demand for US Treasury bonds has improved on expectations that a slowdown in the US economy would force the Federal Reserve to consider rate cuts later. The yields offered on 10-year US Treasury bonds have slipped to near 3.41%.

Scrutiny of US Inflation report shows a different story

The US Dollar remained a major victim on Wednesday after US Consumer Price Index (CPI) softens more than expected and Fed policymakers anticipated a mild recession ahead, which would propel a dial back of quantitative easing. However, a scrutiny of US inflation is telling a different story. The US CPI report indicates that headline inflation has softened more than expectations to 5.0% vs. the former release of 6.0%. A deceleration in headline inflation was the outcome of weaker gasoline prices. The investing community is aware of the fact that oil prices have significantly rebounded in April after a surprise announcement of production cuts by OPEC+, which could spoil Gold Bull’s party in the coming months.

Speaking on the headline inflation, core CPI has rebounded to 5.6%  as expected vs. 5.5% the former release as rent prices remained persistent. This indicates that core inflation could remain extremely stubborn ahead.

It would be early to consider a pause in the Quantitative tightening spell as inflation is still far from the desired target of 2%. San Francisco Fed Bank President Mary Daly said late Wednesday, "There's a lot more in the pipeline of monetary policy tightening," as reported by Reuters. However, she refrained from forecasting the end of the tightening cycle.

Bank of Canada stays with a neutral policy stance

The Canadian Dollar remained firm on Wednesday against the US Dollar despite the Bank of Canada (BoC) keeping its policy rates steady at 4.5%. Bank of Canada Governor Tiff Macklem believes that the current monetary policy is restrictive enough to tame sticky inflation.

The Bank of Canada also ignored upbeat Employment data, released last week, and maintained the status quo, in spite of the fact that upbeat demand for labor could fuel labor earnings and assures a recovery in Canada’s inflation. Analysts at TD Securities expect “The Bank of Canada’s interest rate to remain at 4.50% for all of 2023, as we do expect growth to slow markedly in Q2. That said, if the expected softening in the labor market does not emerge, the Bank of Canada may have little choice but to tighten it again. With markets likely to give the Bank of Canada a pass in June, we see more risk for rate hikes in the July and September meetings.”

USD/CAD technical outlook

USD/CAD is auctioning in a Falling Channel chart pattern on an hourly scale in which every pullback is capitalized by investors as a selling opportunity. The Loonie asset is declining towards the horizontal resistance plotted from April 04 low at 1.3406.

The 50-period Exponential Moving Average (EMA) at 1.3460 is barricading US Dollar bulls from any kind of recovery.

A slippage of the Relative Strength Index (RSI) (14) into the bearish range of 20.00-40.00 will trigger the downside momentum.