USD/CAD's reversal from 1.2500 reaches 1.2425 support area

• The US dollar dives for the second day in a row to test support at 1.2425. 
• Oil prices, BoC rate hike expectations buoy the CAD.
• USD/CAD: A bearish H&S might push the pair to 1.2303 - DBS Bank.

The US dollar is trading lower against its Canadian counterpart for the second consecutive day on Wednesday. The pair’s recovery attempt seen on the early US trading session has been capped at 1.2470 and the greenback has pulled back again following the release of US Consumer Prices Index data.

Lower US yields, BoC supporting the CAD

On a broader picture, the USD/CAD has depreciated about 2.5% so far in October, with the Canadian dollar going through a steady upside trend, boosted by higher oil prices and market expectations the Bank of Canada will be forced to hike rates early next year to tackle inflation pressures. Beyond that, the flattening US yield curve, with the 10-year note down to 1.57 from five-month highs at 1.61% on Tuesday, has increased bearish pressure on the USD.

Furthermore, US macroeconomic data has failed to provide support to the US dollar. The higher than expected US consumer prices, with September's CPI accelerating to a 0.3% monthly rate and 5.4% year on year in September, have confirmed the inflationary pressures looming over the post-pandemic recovery, adding pressure to the Fed to start rolling back its massive bond-buying program.

The dollar has posted a moderately negative reaction to the data, while the investors await the release of the last FOMC meeting’s minutes to assess the possibilities that the bank will start tapering QE in November and the pace of the Bank’s monetary policy normalization plan.

USD/CAD: A bearish H&S might push the pair towards 1.2303 – DBS Bank

From a technical perspective, Benjamin Wong, Strategist at DBS bank, warns about the potential impact of a bearish H&S figure: “In the term, USD/CAD is pushing lower off a bearish head-and-shoulders reversal. A cursory look suggests this pattern should guide USD/CAD lower as its neckline around 1.2594 has clearly crated, validating the pattern (…) Having a calibrated target should give us a measuring rod, as USD/CAD is teasing the weekly charts’ Kijun support at 1.2478. A textbook scenario can see USD/CAD head towards 1.2303. Concurrently, USD/CAD is also framing a triangle break.”

Technical levels to watch