USD/CAD declines towards 1.3500 as lower US Inflation cements less-hawkish Fed policy

• USD/CAD is declining towards the crucial support of 1.3500 as hopes of the Fed’s smaller rate hike have strengthened.
• A decline in gasoline cost and US PPI has trimmed inflation figures.
• Soft US inflation data has supported oil prices as the risk of recession has trimmed.

The USD/CAD pair is displaying back-and-forth moves around 1.3540 in the early Asian session. The Loonie asset has turned sideways after a breakdown of a five-day low of around 1.3561 on Tuesday. The major has been exposed to test the psychological support of 1.3500 as the risk-on impulse has strengthened after the release of a soft United States November inflation report.

The US Dollar Index (DXY) has registered almost a fresh six-month low at 103.59 and is expected to extend its losses further as a sheer decline in United States inflation has accelerated the odds of a slowdown in the current policy tightening pace of the Federal Reserve (Fed). S&P500 extended its upside on Tuesday as lower inflation has trimmed the risk of recession in the US economy. Meanwhile, the 10-year US Treasury yields have dropped significantly to 3.50%.

Fed policymakers were already discussing on slowing down the current interest rate hike to avoid financial risks. Now, a significant decline in inflation has bolstered the expectations.

The headline US Consumer Price Index (CPI) dropped to 7.1% from the expectations of 7.3% and the former release of 7.7%. Thanks to a decline in the cost of gasoline and prices of ultimate goods at the factory gate, which has resulted in a slowdown in inflationary pressures. Also, the core inflation that excludes oil and food prices declined to 6.0% vs. the consensus of 6.1% and the prior release of 6.3%.

On the oil front, oil prices have corrected after hitting $76.00 as a cool-off in ultra-hot US inflation has trimmed weaker economic projections. Meanwhile, investors are keeping an eye on oil inventories reported by the Energy Information Administration (EIA) for fresh cues. It is worth noting that Canada is a leading oil exporter to the US and higher oil prices support the Canadian Dollar.