USD/CAD rebounds from 1.3200 as USD Index attempts recovery ahead of US CPI and BoC policy

• USD/CAD has shown a recovery move from 1.3200 amid a mild rebound in the USD Index.
• Investors are hoping that the Fed will hike interest rates just once more this year.
• The BoC is expected to raise interest rates further as inflation is still above the desired rate.

The USD/CAD pair has found support near the round-level cushion of 1.3200 in the European session. The Loonie asset has rebounded following the recovery action in the US Dollar Index (DXY). The USD Index has attempted recovery after building a base around 101.35.

S&P500 futures are showing topsy-turvy moves after posting mild gains in the London session, portraying a quiet market mood ahead of the United States Consumer Price Index (CPI) data. However, the overall market mood is extremely cheerful.

The USD Index is expected to remain on the tenterhooks as the release of the inflation data will provide meaningful cues about the interest rate guidance. Annualized headline inflation is expected to soften as the impact of a slight rise in gasoline prices must be offset by a drop in utility gas services.

Core inflation could show some persistence as wage pressures have remained elevated due to labor shortages. Although investors are hoping that the Federal Reserve (Fed) will hike interest rates just once more this year Fed policymakers are still conveying two more interest rate hikes as inflation is still stubborn due to the strong labor market.

The Canadian Dollar will show a power-pack action ahead of the interest rate decision by the Bank of Canada (BoC). Analysts at ING expect “BoC hiked interest rates 25 bps last month having left them untouched since the last hike in January. We don’t see last month’s move as a one-off. To restart the hiking process means that the BoC feels it has unfinished business, and with the jobs market looking tight and inflation running above target we expect the BoC to hike by a further 25 bps.”

On the oil front, oil prices are facing delicate barricades around $75.00 as global central banks are preparing for a fresh interest rate hike cycle. It is worth noting that Canada is the leading exporter of oil to the United States and higher oil prices support the Canadian Dollar.