USD/CAD inches lower to near 1.3550 as US Dollar declines on downbeat US yields

• USD/CAD surged by 0.85% on an unexpected upside in US inflation on Tuesday.
• The higher Crude oil prices are contributing support for the Canadian Dollar.
• The probability of the Fed avoiding rate adjustment in March surged to 93%.

USD/CAD retreats after Tuesday’s surge, edging lower to near 1.3550 during the early European session on Wednesday. The decline in the US Dollar (USD) is attributed to the decrease in US Treasury yields, thereby weakening the USD/CAD pair.

The Canadian Dollar (CAD) appears to have strengthened against the US Dollar, possibly buoyed by higher Crude oil prices. West Texas Intermediate (WTI) oil price is poised to continue its winning streak, trading around $77.50 per barrel at the time of writing. Despite facing challenges, the price of Crude oil has managed to recover its intraday losses.

On Tuesday, the USD/CAD pair surged by 0.85%, driven by the unexpected upside in US inflation for January. The market sentiment has shifted significantly, with expectations of no rate adjustment by the Federal Reserve in March surging to 93%, while investors are now considering the possibility of a rate cut by the Federal Reserve (Fed) in June.

The US headline Consumer Price Index (CPI) exceeded expectations, coming in at 3.1%, although slightly lower than the previous rate of 3.4%. Meanwhile, the US Core CPI (YoY) remained unchanged at 3.9%, contrary to market expectations of a decline to 3.7% in January.

Recent Canadian employment data has painted a healthier picture of the labor market, potentially leading the Bank of Canada (BoC) to delay their forecasts on rate cuts until June from April. However, BoC Governor Tiff Macklem indicated that the central bank's focus has shifted from debating whether interest rates are high enough to discuss how long rates need to remain at current levels.