USD/CAD sees consolidation around 1.3400 ahead of Canada Inflation, oil surpasses $80.00

• USD/CAD is expected to consolidate near 1.3400 as investors await Canada’s inflation release for fresh cues.
• Federal Reserve might look for a rate hike by mere 25 bps led by a slowdown in December’s inflation report.
• The Bank of Canada will continue to hike interest rates despite a likely ease in inflationary pressures.
• USD/CAD is broadly declining towards the horizontal support placed at 1.3224.

USD/CAD has rebounded to near the round-level resistance of 1.3400 in the early Asian session. The Loonie asset is likely to remain sideways as investors are shifting their focus toward the release of Canada’s inflation, which is scheduled for Tuesday. Till then, the major will dance to the tunes of the market sentiment.

S&P500 futures are displaying a marginal sell-off in early Asia, portraying a short-term caution in the overall upbeat market mood. The return on US Treasury bonds scaled to 3.50%, surprisingly in the risk-appetite market theme. This also provided a cushion to the US Dollar Index (DXY) from any further weakness below 101.76.

Investors to look closely at United States Retail Sales and PPI data

After a slowdown in December’s inflation report in the United States, investors have shifted their focus toward the Retail Sales and Producer’s Price Index (PPI) data, which will release on Wednesday. A decline in the headline Consumer Price Index (CPI) to 6.5% has already bolstered the odds of a slowdown in the pace of policy tightening by the Federal Reserve (Fed) for its February monetary policy meeting. Money market participants see a 91.6% chance that the Federal Reserve will hike interest rates further by 25 basis points (bps) in February.

As per the consensus, a decline in headline factory gate prices of goods and services (Dec) is expected at 6.8% from the former release of 7.4%. Also, the core Producer Price Index might trim to 5.9% from the former release of 6.2% in a similar period. A decline in the US PPI could be the outcome of lower gasoline prices as it might be resulting in a lower cost of production. Also, producers are aiming to find equilibrium due to a decline in retail demand.

The monthly Retail Sales (Dec) data is seen higher at 0.1% vs. the contraction of 0.6% reported earlier.

Canada’s Consumer Price Index hogs limelight

This week, the major catalyst that will bring power-pack action for the Canadian Dollar is Tuesday’s Consumer Price Index (Dec) data. According to the market estimates, the annual headline CPI will trim to 6.3% from the former release of 6.8%. However, the core inflation will escalate to 6.1% vs. 5.8% released earlier.

Analysts at RBC Economics, at Financial Post, stated that grocery price growth, which surged 11.4% year over year in November, should slow in 2023 as supply chain disruptions ease further and lower agriculture commodity prices feed through. Moreover, gas prices fell 13% in December from the month before, which could be the reason behind lower expectations for headline inflation.

The Bank of Canada (BoC) has been hiking interest rates to achieve 2% inflation by fighting against stubborn inflation. Bank of Canada Governor Tiff Macklem is set to announce the first monetary policy meeting of CY2023 next week and is likely to hike interest rates further moderately. Desjardins economists say that despite a likely easing of inflation in December’s data, they still see the Bank of Canada raising rates another 25 basis points later this month, as reported by Financial Post.

Higher oil prices to support Canadian Dollar

West Texas Intermediate (WTI) has scaled above the critical resistance of $80.00 amid optimism about economic recovery in China. The reopening of China after a long lockdown period and growing expectations for monetary easing by the People’s Bank of China (PBoC) to spurt growth and push inflation higher.

Strategists at TD Securities expect the global benchmark crude to trade at $100/b in the latter part of 2023. Once China normalizes post-COVID, the Middle Kingdom's consumption should jump by as much as one million b/d over the next six months from recent lows, with demand increasing another 0.5 million b/d by year-end.

On the supply side, the Oil and Petroleum Exporting Countries (OPEC) might look for right-sizing production to match any demand growth later as the Federal Reserve (Fed) is also looking to decelerate the pace of policy tightening after a slowdown in the United States inflationary pressures. It is worth noting that Canada is a leading exporter of oil to the United States and higher oil prices will provide strength to the Canadian Dollar.

USD/CAD technical outlook

USD/CAD is declining towards the horizontal support plotted from July 14 high at 1.3224 on the daily scale. The Loonie asset has shifted below the 100-period Exponential Moving Average (EMA) at 1.3428, which indicates that the downside bias has strengthened now. Going forward, the south side move in the major is likely to find an immediate cushion around the upward-sloping trendline from June 8 low at 1.2518. Also, the 200-EMA at 1.3241 will act as a major support.

The Relative Strength Index (RSI) (14) is hovering around 40.00 and may witness a sheer fall if drops into the bearish range of 20.00-40.00.