USD/CAD bears now approaching support from 200-day SMA

The USD/CAD pair remains confined in a narrow trading band through the early European session. The pair is currently meandering around the 1.2770-1.2765 area, just a few pips above a two-month low and the 200-day SMA.

The US dollar meets with a fresh supply and remains well within the striking distance of its lowest level since late June, set in the aftermath of softer US consumer inflation figures on Wednesday. This, in turn, is seen acting as a headwind for the USD/CAD pair and capping spot prices near the 100 DMA breakpoint – now turned resistance.

Following the release of the weaker-than-expected US CPI report for July, on Wednesday, investors rushed to trim their bets for a larger 75 bps Fed rate hike at the September policy meeting. This, along with a softer tone around the US Treasury bond yields and the risk-on impulse in the equity markets, continues to drive flows away from the safe-haven greenback.

The commodity-linked loonie, meanwhile, is gaining support from an uptick in crude oil prices which is exerting some downside pressure on the USD/CAD pair. That said, oil may not sustain its uptrend as concerns grow that a global economic downturn could hit fuel demand. This, along with the overnight hawkish remarks by Fed officials, should limit the USD losses and keep the pair supported.

The mixed fundamental backdrop dovetails with mixed technicals and warrants some caution for bearish traders. Although an overnight break took the pair below the 100-day SMA for the first time since June, the 200-day SMA is likely to pose a major obstacle to bears, where it is currently sitting just below spot at 1.2743. At least a clear break and daily close below the MA would be necessary for the green light on more losses, ideally accompanied by a fundamental development providing added negative confirmation.

Market participants now look forward to the release of the US Producer Price Index (PPI), due later during the early North American session. Apart from this, the US bond yields and the broader risk sentiment will drive the USD demand. Traders will also take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair.

Technical levels to watch