USD/CAD remains depressed below 1.2900, downside seems cushioned ahead of US CPI

• USD/CAD meets with a fresh supply on Wednesday and erodes a part of the overnight gains.
• Subdued USD price action turns out to be the only factor exerting some downward pressure.
• Weaker oil prices could undermine the loonie and lend support ahead of the US CPI report.

The USD/CAD pair struggles to capitalize on the overnight positive move and meets with a fresh supply in the vicinity of the 1.2900 mark on Wednesday. The pair remains depressed through the first half of the European session and is currently trading near the daily low, around the 1.2865-1.2870 region.

The US dollar continues with its struggle to gain any meaningful traction amid the uncertainty over the Fed's rate hike path and turns out to be a key factor offering support to the USD/CAD pair. The New York Fed’s Survey of Consumer Expectations showed that the inflation outlook fell sharply in July and pushed back speculations for a more aggressive policy tightening by the Fed.

The markets, however, are still pricing in around 70% chances for a 75 bps rate hike at the September FOMC meeting. This, along with the prevalent cautious mood, is acting as a tailwind for the safe-haven buck and should help limit deeper losses for the USD/CAD pair. The market sentiment remains fragile amid growing recession fears and US-China tensions over Taiwan.

Investors, meanwhile, remain concerned that a global economic downturn could hit fuel demand. Adding to this, the latest progress to revive the Iran nuclear accord might clear the way to boost crude supply in a tight market. This, in turn, prompts fresh selling around crude oil prices, which might undermine the commodity-linked loonie and further lend support to the USD/CAD pair.

Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the US consumer inflation figures, due for release later during the early North American session. The crucial US CPI report would play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the USD/CAD pair.

Technical levels to watch