USD/CAD sees more weakness below 1.3550 as lower US PCE weakens US Dollar Index

• USD/CAD has surrendered the previous week’s low around 1.3560 amid weakness in the US Dollar Index.
• A decline in the US PCE and US Durable Goods Orders data has cemented expectations for lower inflation ahead.
• An increment in oil prices led by supply worries on expected cuts from Russia has supported the Canadian Dollar.
• USD/CAD is expected to deliver more weakness below 1.3550 amid a Double Top formation.

USD/CAD has witnessed a steep fall after surrendering the previous week’s low around 1.3560 in the early European session. The Loonie has dropped to near 1.3550 and is expected to display more weakness as the US Dollar Index (DXY) has faced immense pressure led by a decline in the United States Personal Consumption Expenditure (PCE) Price Index data released on Friday.

The US Dollar Index has turned sideways in a 103.60-103.80 range after a gap down open. The appeal for the USD Index has been trimmed led by upbeat market sentiment. A significant decline in the consumption expenditure by households in the United States economy has improved the risk appetite of the market participants.

Meanwhile, S&P500 futures have extended their gains after a firmer revival on Friday. A sheer drop in the consumption expenditure and the United States Durable Goods Orders data has provided comfort to the US equities. The return on 10-year US Treasury bonds is hovering around 3.74%.

A decline in US PCE favors further inflation softening

Federal Reserve (Fed) chair Jerome Powell and his teammates are putting their blood and sweat into achieving price stability in the United States economy. Inflation is still roaring, however, a gradual slowdown in the inflationary pressures on a recurring basis is delighting the Fed policymakers.

The headline PCE dropped to 5.5% while the street was expecting a drop of 5.3% but remained significantly lower than the former release of 6.1%. While the core PCE Price Index remained in line with the estimates of 4.7% and lower than the prior release of 5.0%. This has cemented expectations of further decline in the United States inflation ahead. Consumption expenditure by households is a critical inflation indicator and a decline in the same is going to force the producers to curtail prices of goods and services at factory gates.  

US Durable Goods Orders contraction favors less-hawkish Federal Reserve policy

Apart from the decline in the United States PCE data, the catalyst that has impacted the US Dollar Index is the decline in the demand for Durable Goods. The US Durable Goods Orders have contracted by 2.1% against the consensus of a 0.6% contraction. A decline in demand for Durable Goods indicates a further drop in the core inflation measures as a slowdown in demand is critical for softening inflation in the economy.

This may compel the Federal Reserve to go light on the interest rates by looking for a smaller rate hike. Also, a continuous decline in the overall demand could result in a lower interest rate peak by the Fed.

Oil prices above $80.00 support the Canadian Dollar

Oil prices have extended their upside journey and have crossed the psychological hurdle of $80.00 on escalating supply worries after Russia warned of supply cuts to offset the price cap imposed by G7 nations along with the European Union. According to Russia’s Deputy Prime Minister Alexander Novak, Moscow may cut its oil output by 500,000-700,000 barrels a day in early CY2023. Earlier, the G7 levied a price cap on Russian oil supply at $60/barrel to weaken its income for funding arms and ammunitions requirement for war with Ukraine.

It is worth noting that Canada is a leading exporter of oil to the United States and higher oil prices support the Canadian Dollar.

USD/CAD technical outlook

USD/CAD has witnessed a steep fall after forming a Double Top chart pattern on an hourly scale. The Loonie asset witnessed a steep fall while attempting to surpass the crucial resistance of 1.3700 with less enthusiasm and zeal. The major is expected to display sheer downside if it surrenders the crucial support placed from December 14 low around 1.3520.

The 50-and 200-period Exponential Moving Averages (EMAs) at 1.3615 have delivered a death cross, which indicates more weakness in the Lonnie asset ahead.

Meanwhile, the Relative Strength Index (RSI) (14) has shifted into the bearish range of 20.00-40.00, which signals that the downside momentum has been triggered.