USD/CAD retreats from 1.3400 as USD Index extends losses, US Inflation eyed

• USD/CAD has sensed selling pressure after a recovery move to near 1.3400 as oil prices eye more upside.
• US President Joe Biden is interested in a separate discussion for the budget.
• If US inflation remains persistent, the Fed would start preparing for hiking interest rates further.

The USD/CAD pair has sensed selling pressures after a rebound to near the round-level resistance of 1.3400 in the Asian session. The Loonie asset has faced selling interest as the US Dollar Index (DXY) has extended its correction further to 101.55 after US debt ceiling negotiations failed a decisive outcome.

S&P500 futures have added decent gains in Asia amid a decline in the USD Index’s appeal as a safe-haven. However, the overall market mood is risk averse as a delay in the US debt ceiling outcome could impact the long-term outlook of the US economy. This would have a significant impact on US equities.

US President Joe Biden is interested in a separate discussion of the budget but is not interested in spending cuts for the approval of a debt-ceiling increase. The street is anticipating a bipartisan agreement between the White House and Republicans as US default on obligated payments is not an option.

As delegates will meet again for US debt ceiling negotiations on Friday, investors are shifting their focus toward the release of the US Consumer Price Index (CPI) data. Monthly headline inflation is seen accelerating by 0.4% vs. the former pace of 0.1%. Annual headline inflation is expected to remain steady at 5.0% while core CPI that excludes oil and food prices is seen softening to 5.5% from the prior release of 5.6%.

If US inflation remains persistent, the Federal Reserve (Fed) would start preparing for hiking interest rates further as its major agenda is to achieve price stability.

On the oil front, oil prices are gathering strength for a fresh rally above the immediate resistance of $73.50 as investors have digested fresh interest rate hikes from the Fed and the European Central Bank (ECB). Going forward, investors will keep an eye on the oil inventories to be reported by US Energy Information Administration (EIA) for the week ending May 05.

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