USD/CAD drops to two-week low post-Canadian CPI, eyes 1.2500 mark amid weaker USD

• A combination of factors prompted aggressive selling around USD/CAD on Wednesday.
• An uptick in crude oil prices, stronger Canadian inflation figures underpinned the loonie.
• Modest USD pullback from the two-year peak also contributed to the intraday selling bias.

The USD/CAD pair continued losing ground through the early North American session and dropped to a two-week low in reaction to a stronger Canadian CPI report, though recovered a few pips thereafter. The pair was last seen trading just a few pips above the 1.2525-1.2530 region, still down over 0.70% for the day.

Having failed to find acceptance above the very important 200-day SMA, the USD/CAD pair witnessed aggressive selling on Wednesday and finally broke down below a three-day-old consolidation phase. An uptick in crude oil prices underpinned the commodity-linked loonie and exerted downward pressure on spot prices amid modest US dollar corrective pullback from the two-year peak.

Concerns about tight global supply and a potential European Union (EU) embargo on Russian gas, assisted crude oil prices to recover a part of the previous day's heavy losses. Apart from this, hotter-than-expected Canadian consumer inflation figures provided an additional boost to the domestic currency and further contributed to the heavily offered tone surrounding the USD/CAD pair.

Statistics Canada reported that the headline CPI jumped to the highest level since January 1991 and rose 6.7% YoY in May, surpassing expectations for a reading of 6.1% and 5.7% previous. Adding to this, the Bank of Canada's core CPI, which excludes the eight most volatile items, rose by 1% MoM in March and accelerated to 5.5% on yearly basis, both beating consensus estimates.

On the other hand, the USD witnessed some profit-taking amid a sharp decline in the USD/JPY pair and retreating US Treasury bond yields. That said, the prospects for a more aggressive policy tightening by the Fed should act as a tailwind for the buck. This makes it prudent to wait for a break below the 1.2500 psychological mark before placing fresh bearish bets around the USD/CAD pair.

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