USD/CAD turns sideways around 1.3550 as street sees inflation above Fed’s target in 2023

USD/CAD is displaying a sideways performance in the early European session as investors are hesitating in building positions ahead of the long weekend. The Loonie asset is displaying a lackluster performance in a narrow range around 1.3550 amid indecisiveness in the global markets towards inflation projections for CY2023.

The risk-perceived currencies are failing to capitalize on the improved risk appetite of investors after Thursday’s action. S&P500 displayed a firmer recovery after investors saw value-buying in the equities domain of the United States. In early Friday, S&P500 futures are holding their Thursday gains but are failing to extend their recovery further. It seems that investors are preferring to go light in CY2023 as volatility could heat up.

The US Dollar Index (DXY) is struggling to extend its gains above the immediate resistance of 103.70 after a recovery attempt from 103.50. The USD Index has been oscillating in a bounded range of 103.50-104.60 since Monday. Meanwhile, caution in the market is supporting the 10-year US Treasury yields. The return in 10-year US Treasury bonds is holding above 3.83%.

A rise in weekly jobless claims impacted the US Dollar

The US Dollar Index witnessed selling pressure on Thursday after the United States Department of Labor (DoL) reported an increase in the number of individuals applying for jobless claims for the very first time. The economic data landed at 225K for the week ending December 23, higher than the former release of 216K. The impact of higher interest rates by the Federal Reserve (Fed) has forced the firms to pause the recruitment process. Firms have halted the employment creation process as the street sees bleak economic growth amid expectations of the continuation of extremely hawkish monetary policy by the Federal Reserve. This led to a surge in jobless claims.

Street sees no achievement of the Fed’s 2% inflation target in 2023

In CY2022, the agenda of the Federal Reserve chair Jerome Powell and his teammates has remained the achievement of price stability. Federal Reserve policymakers continuously hiked interest rates to squeeze the supply of the US Dollar into the economy. No doubt, the central bank managed to drag the headline Consumer Price Index (CPI) from its peak of 9.1% but the road to recovery is far from over.

Economists at TD Securities are of the view that inflation in the United States will remain well above 3% by the end of Q4 2023. “We look for headline inflation to end the year at a robust 7.1% YoY pace in Q4, but to slow to 3.1% in Q4 2023. We also forecast Core CPI inflation to end the year at a still-high 6.0% but to decelerate to 3.3% in Q4 2023.”

Also, in the opinion of economists at Deutsche Bank “Headline inflation seems to have already peaked in the United States.” However, it will still be well above the target set by the Fed in 2023.

Oil price struggles to recapture $80.00

China’s Covid-19 status is getting vulnerable each day as the number of infections are rising dramatically.  Also, death numbers are scaling higher as medical facilities are unable to address each infected individual. This has also forced various nations to demand negative Covid reports of arrivals from China in order to safeguard themselves from the pandemic. The street is in a dilemma whether to support oil prices by considering optimism over the reopening of the Chinese economy or to consider the short-term pain due to supply chain disruptions. The oil price has rebounded after dropping to near $77.00 but is struggling to recapture the crucial hurdle of $80.00. It is worth noting that Canada is a leading oil exporter to the United States and higher oil prices might support the Canadian Dollar.

USD/CAD technical outlook

USD/CAD has shifted its auction profile below the upward-sloping trendline placed from November 16 low at 1.3228 on a four-hour scale. The Loonie asset is hovering below the 200-period Exponential Moving Average (EMA) around 1.3550.

Meanwhile, the Relative Strength Index (RSI) (14) is oscillating in a 40.00-60.00 range. A slippage of the momentum oscillator inside the bearish range of 20.00-40.00 will trigger a bearish momentum.