USD/CAD continues bearish momentum, dips under 1.2550 in run-up to US CPI as oil hits multi-week highs

• USD/CAD recently dipped below 1.2550 as FX market focus shifts to upcoming US CPI data.
• The loonie has been supported in recent sessions as oil prices have surged.
• A potential hawkish shift from the BoC in the coming weeks might further add to recent CAD tailwinds.

USD/CAD has continued recent bearish momentum on Wednesday even though other asset classes and major currency pairs have been trading more tentatively ahead of the release of key US Consumer Price Inflation data at 1330GMT. The pair recently dipped under 1.2550, taking its losses on the week to more than 100 pips or about 0.8%, as the loonie continues to outperform in the FX space alongside other commodity-sensitive currencies as it tracks upside in oil.

WTI is currently trading in the mid-$81.00s having recently tested $82.00 earlier in the session, which put it at near two-month highs and well above pre-Omicron levels. Continued expectations for strong demand growth in 2022, as emphasized by the US EIA on Tuesday upping their 2022 demand growth forecasts, coupled with ongoing OPEC+ producer struggles to lift output and no sign of any nuclear deal with Iran has been lifting prices. Should this trend continue and should the dollar fail to reap any post-US data strength, then USD/CAD could soon be looking at a test of its 200-day moving average in the 1.2500 area and the important balance zone in the 1.2480s just below it.

A successful break below the 200DMA would send a medium-term bearish signal and could open the door to a test of Q4 2021 lows in the 1.2300 area. Following recent strong economic data, the BoC is expected to soon pivot hawkishly (perhaps at the 26 January meeting) by bringing forward its guidance for when rate hikes could commence to the end of Q1 from no earlier than Q2. That would open the door to a very likely March rate hike and could offer the loonie support in the coming months, strengthening the USD/CAD bearish thesis.