USD/CAD seesaws around September's high amid soft oil prices, Canada CPI, Fed in focus

• USD/CAD fades bounce off from intraday low around three-month high.
• Omicron fears, mixed signals over US inflation join debt ceiling solution to test bulls.
• Hawkish expectations from Fed, escalating US-China tussles favor upside momentum.
• November’s US Retail Sales, Canada CPI will offer additional clues, FOMC is the key.

USD/CAD remains sidelined near the highest levels since September, recently picking up bids to 1.2855 as traders brace for Wednesday’s bell in Brussels.

The Loonie pair’s latest gains could be linked to the weakness in Canada’s main export item, WTI Crude oil, as well as the market’s cautious sentiment ahead of the US Federal Reserve (Fed) monetary policy meeting. On the contrary, mixed signals concerning the US inflation and the recent pullback of the US Dollar Index (DXY) challenge the bulls.

That said, WTI crude oil refreshes intraday low, near to the weekly bottom of $69.33, by the press time. Further, a drop in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, to 11-week low contrast with a record high Producer Price Index (PPI) for November to test Fed hawks.

It’s worth noting that news that the US House passed a bill to raise the debt limit, as well as President Joe Biden’s optimism over getting his Build Back Better (BBB) plan through the House in 2021 seem to weigh on the DXY of late. Alternatively, concerns about the US House passage of the Uyghur Bill aimed at China and the US-Iran tussles are extra geopolitical catalysts that challenge the risk appetite and underpin the US dollar’s safe-haven demand.

While portraying the market’s indecision, the US 10-year Treasury yields fail to extend the previous day’s rebound from a weekly low whereas stock futures in the US and Europe print mild gains at the latest.

Moving on, the US Retail Sales for November and Canadian Consumer Price Index (CPI) for the said month are likely additional catalysts, other than the Fed, which can direct short-term USD/CAD moves. Given the hawkish hopes from the Federal Open Market Committee (FOMC), contrasting to the Omicron fears, a surprise will have higher repercussions and hence the event should be traded with ultimate caution.

Technical analysis

Overbought RSI conditions challenge USD/CAD bulls. Adding to the upside filter is the 61.8% Fibonacci retracement (FIbo.) level of September 2020 to June 2021 downside, around 1.2880. Alternatively, the 10-DMA level of 1.2767 restricts immediate losses ahead of the 50% retracement close to 1.2710.