USD/CAD flirts with fortnight top around 1.2700, US/China inflation, Canada employment eyed

• USD/CAD bulls take a breather after the biggest daily jump in 2022.
• BOC’s Macklem reiterated support for higher rates amid inflation fears.
• US dollar benefits from risk-aversion, oil prices ease.
• China/US CPI, Canada Employment data for May will be crucial for fresh impulse.

USD/CAD steadies around 1.2700, following the big leap to a two-week high, as markets turn cautious ahead of the key data/events scheduled for publishing on Friday. The Loonie pair rallied the most since November 2021 the previous day as inflation and growth fears roiled market sentiment, underpinning the US dollar. Also contributing to the pair’s run-up could be softer prices of Canada’s main export item, namely WTI crude oil, as well as the Bank of Canada’s (BOC) remarks.

That said, global markets witnessed heavy risk-aversion on Thursday after the European Central Bank (ECB) conveyed fears of inflation weighing on growth, via their forecasts. The bloc’s central bank also matched market consensus while announcing an end of Quantitative Easing from July 1 and 25 basis points (bps) of a rate hike on July 25, versus expectations of a 50 bps move.

At home, the Bank of Canada (BOC) released details of a bank stress test and conveyed challenges emanating from tighter monetary policies. Even so, BOC Governor Tiff Macklem was spotted favoring faster rate hikes by citing the overheating economy.

Elsewhere, the White House has already conveyed the risk of higher inflation ahead of today’s US Consumer Price Index (CPI) data while the World Bank (WB) and the Organisation for Economic Co-operation and Development (OECD) have raised concerns over economic growth.

Furthermore, the resurgence of covid-led activity restrictions in Shanghai and Beijing joined no solution to the Russia-Ukraine crisis to exert additional downside pressure on the market’s sentiment.

As a result, the Wall Street benchmarks posted the biggest daily loss in a week, down for the second consecutive day, whereas the US 10-year Treasury yields also refreshed their monthly high before retreating to 3.04%.

Moving on, China’s CPI and Producer Price Index (PPI) data for May, expected 2.2% and 6.4% versus 2.1% and 8.0% in that order, will offer immediate directions to the USD/CAD traders ahead of the US CPI data and Canada’s jobs report. Given the already known fears of higher inflation, a disappointment from the Canadian employment numbers becomes necessary for the pair buyers to keep reins.

Also read: US Consumer Price Index May Preview: Fed policy is set but there is room for surprise

Technical analysis

Despite a successful break of the 200-DMA and one-month-old descending trend line, respectively around 1.2660 and 1.2630, the USD/CAD buyers need validation from the convergence of 21-DMA and 50-DMA, near 1.2725-30, to extend the run-up.