USD/CAD eyes downside to near 1.3250 as Fed confirms signs of a disinflationary process

• USD/CAD is expected to extend its downside journey to near 1.3250 amid a weaker USD Index.
• The Fed has confirmed that the disinflationary process in the US has started.
• Oil prices dropped after US EIA reported a higher-than-expected oil inventory build-up.

The USD/CAD pair has continued its two-day losing spell after slipping below the critical support of 1.3270 in the Asian session. The Loonie asset witnessed a massive sell-off on Wednesday after back-to-back signs of inflation softening in the United States.

The US Manufacturing PMI (Jan) reported a third straight contraction after landing at 47.4, lower than the consensus of 48.0 and the former release of 48.4. Also, the Manufacturing New Orders Index that reflects forward demand plunged to 42.5 against the estimates of 46.1 and the prior release of 45.1. Federal Reserve (Fed) chair Jerome Powell in his commentary cited that consumer spending has slowed down dramatically and now the focus of the central bank will be on balancing the labor costs further. It is worth noting that US Employment Cost Index (Q4) dropped to 1%.

The three-month declining trend in the US Consumer Price Index (CPI) and Producer Price Index (PPI), a slowdown in economic activities and consumer spending clearly states that the disinflation process has been initiated. Also, Fed’s Powell in his commentary has confirmed the view after citing “Can now say for the first time ‘Disinflationary process has started.’’

The higher risk appetite of the market participants has improved the demand for risky assets. S&P500 futures have extended their gains in Asian morning after a bullish Wednesday session. The US Dollar Index (DXY) has sensed barricades after a pullback move to near 100.80 amid the risk-on market mood. While the 10-year US Treasury yields have rebounded above 3.41%.

On the Loonie front, monthly Gross Domestic Product (GDP) (Nov) data remained well above at 0.1% vs. a flat performance expected by the street. Canadian GDP has not shown contraction in its GDP numbers on a monthly basis and is not expected to show ahead as the Bank of Canada (BoC) has paused its policy tightening process after pushing interest rates to 4.50%.

Meanwhile, the oil price is demonstrating a recovery move after dropping to near $76.00. The black gold witnessed selling pressure on Wednesday after US Energy Information Administration (EIA) showed a build-up of oil inventories at 4.14M for the week ending January 27. It is worth noting that Canada is a leading exporter of oil to the United States and lower oil price impact the Canadian Dollar.