USD/CAD advances firmly around 1.2860s ahead of Fed’s June meeting

• Wall Street collapses, remains in a bear market, and the USD rises.
• High inflation might trigger an aggressive US Federal Reserve reaction to tame inflation, despite increasing fears of a US recession.
• USD/CAD Price Forecast: Will face solid resistance at around 1.2880-1.2900.

The USD/CAD gained traction on Monday and extended its rally to three consecutive days, even though it retreated after reaching a daily high near 1.2880s. At the time of writing, the USD/CAD is trading at 1.2864, up by 0.60%.

High inflation in the US increases the odds of an aggressive Fed

US equities reflect a dampened market mood, so the USD/CAD edged higher. Wall Street’s stock indexes record losses between 2.08% and 4.37%, while US Treasury yields skyrocket on fears that an aggressive Federal Reserve tightening cycle might cause a recession in 2023. Last Friday’s inflation report weighed on investors as they reshuffled their portfolios, dumping riskier assets for safe-haven currencies. That boosted the greenback,  with the US Dollar Index (DXY) gaining close to 0.70%, sitting at 104.893. Earlier, the DXY reached a multi-year high of around 105.065.

Besides the aforementioned, China’s coronavirus fears are back. A dozen Covid cases linked to a Beijing bar have triggered a race for millions of people facing mandatory testing and thousands under targeted lockdowns via Reuters. The re-emergence of infections is raising concerns about the economic outlook of the second-largest economy.

In the meantime, crude oil prices extend their gains. WTI, the US crude oil benchmark, rose 0.27%, exchanging hands at $121.06 per barrel but fails to lift the Canadian dollar, which is dragged down by global risk aversion.

The lack of economic data in the US and Canadian calendar left the USD/CAD adrift to a market sentiment play. The Canadian docket will feature New Motor Vehicle Sales and Manufacturing sales on Tuesday. On the US front, prices paid by producers for May will be revealed. An uptick on the latter could shift Fed officials towards a higher rate hike, though the baseline scenario remains 50 bps increases.

USD/CAD Price Forecast: Technical outlook

The USD/CAD witnessed a jump from around 1.2550 to 1.2880s in a three-day rally. On its way north, the major broke above the daily moving averages (DMAs), shifting from a neutral-downward bias to a neutral-upwards. Nevertheless, the USD/CAD will face a solid resistance at around 1.2885, the May 25 high, which, if broken, would pave the way for further gains.

If that scenario plays out, the USD/CAD first resistance would be 1.2900. Break above would expose December 20, 2021, daily high at 1.2964, followed by a test of the psychological 1.3000.