USD/CAD retreats towards multi-day low under 1.2600 as oil flirts with three-month high

• USD/CAD fades bounce off seven-week low, stays on the way to fifth weekly loss.
• Fears of faster monetary policy normalization to weigh on economic growth underpin US dollar gains ahead of Friday’s inflation data.
• Oil prices cheer China’s gradual recovery from covid, geopolitical concerns.
• OECD cuts global economic forecasts to challenge the market sentiment and probe pair bears.

USD/CAD teases a return to the bear’s area, after a brief journey with buyers, as the quote eases back towards the seven-week low during the inactive Asian session on Thursday. That said, the Loonie pair fades the previous day’s bounce off the multiday low of 1.2517, printing mild losses around 1.2550 by the press time.

The quote’s latest weakness could be linked to the recently steady US dollar and firmer prices of Canada’s key export item, namely the WTI crude oil.

That said, the black gold stays firmer around a three-month high amid hopes of more energy demand due to China’s unlocks of the covid-led activity restrictions. Also favoring the energy benchmark is the drawdown of crude in the Strategic Petroleum Reserve (SPR) and the Russia-Ukraine crisis. “US commercial crude oil inventories rose unexpectedly last week, while crude in the Strategic Petroleum Reserve fell by a record amount as refiners ramped up production to pre-pandemic levels, the Energy Information Administration said on Wednesday,” said Reuters.

On the other hand, the US Dollar Index (DXY) regained upside momentum as it closed with 0.21% daily gains around 102.55 on Wednesday, after retreating from 102.77. The greenback’s gains could be linked to the broad fears concerning growth and inflation.

The market pessimism gained momentum after White House spokeswoman Karine Jean-Pierre said they expect the inflation numbers to be released at the end of the week to be elevated. Also supporting the forecasts are the recently firmer US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data. That said, the inflation precursor stays firmer around the one-month high of late.

On the same line, the Organisation for Economic Co-operation and Development (OECD) cuts the global growth outlook for 2022 while World Bank (WB) President David Malpass warned that faster-than-expected tightening could recall a debt crisis similar to the one seen in the 1980s.

Amid these plays, the Wall Street benchmarks snapped a two-day rebound whereas the US 10-year Treasury yields rose 5.3 bps to 3.027%.

Looking forward, today’s monetary policy decision from the European Central Bank (ECB) appears the key event for markets, as well as for the USD/CAD traders due to its impact on the US dollar. However, major attention will be given to Friday’s US Consumer Price Index (CPI) for May and the Canadian employment report. That said, hawkish expectations from the ECB challenge the recent US dollar gains.

Technical analysis

Unless providing a daily closing beyond the monthly resistance line, around 1.2570 by the press time, USD/CAD prices are on the way to testing the late April swing low near 1.2460.