USD/CAD struggles to defend 1.2100 with eyes on BOC

• USD/CAD bulls seem too tired as recovery capped below 1.2120.
• Cautious sentiment favors US dollar but WTI gains restrict the pair’s upside.
• BOC is likely to stand pat but reaction over Q1 GDP becomes the key.
• China inflation data, risk catalysts are important as well.

USD/CAD seesaws around 1.2115 amid a sluggish Asian morning on Wednesday. The loonie pair rose for the first time in three days on Tuesday amid broad US dollar strength and anxiety ahead of today’s Bank of Canada (BOC) monetary policy meeting. In doing so, the quote ignored strong WTI, the main export item Canada.

Given the indecision over the Fed’s next moves, amid strong data and downbeat inflation expectations, the market players rushed to the US Treasury bonds for the haven. This weighed down the yields and helped the US dollar index (DXY) to snap a two-day fall the previous day.

Against this, a jump in oil prices, led by fears of receding supplies and anticipated increase in demand, failed to please the USD/CAD bears. Also negative for the pair could be the upbeat trade numbers from Canada. That said, Canada’s International Merchandise Trade for April grew past -0.8 B to +0.59 B even as Imports and Exports eased during the stated month.

Additionally, chatters of early unlock in Canada, versus the planned expiry around mid-June, could have helped the Canadian dollar (CAD) but couldn’t conquer the King dollar.

It’s worth noting that the market consolidates by the press time and the WTI’s trading above $70.00 probes USD/CAD buyers of late. However, fears of downbeat comments from the Bank of Canada (BOC), followed by the recently weaker Q1 GDP, may limit the pair’s downside.

“Even after the disappointment on Q1 GDP, we expect the Bank will argue that the outlook is unfolding roughly in line with their projections from the April MPR. We also expect the Bank to maintain that base effects are the primary driver for the recent strength in CPI. Forward guidance should remain unchanged from the April policy statement, with the Bank continuing to signal 2022H2 for rate hikes while noting decisions on QE will be guided by its assessment of the recovery,” said TD Securities.

On the other hand, a lack of major data/events and indecision ahead of Thursday’s key US inflation and ECB may keep favoring the US dollar.

Technical analysis

Given the USD/CAD pair’s daily closing beyond a monthly falling trend line and 21-day SMA confluence, around 1.2085-90, bulls are likely to aim for the mid-1.2100s. However, any further upside will have a bumpy road until staying below the March low of 1.2365.