USD/CAD rallies beyond 1.3300 post-Canadian CPI, bulls retain control amid stronger USD

• USD/CAD regains strong positive traction on Tuesday amid broad-based USD strength.
• Aggressive Fed rate hikes, a further rise in the US bond yields continue to lift the buck.
• Softer Canadian CPI, subdued oil prices undermine the loonie and remain supportive.

The USD/CAD pair continues scaling higher through the early North American session and refreshes the daily high, around the 1.3315-1.3320 area in reaction to softer Canadian consumer inflation figures.

Statistics Canada reported this Tuesday that the headline CPI declined by 0.3% in August and the yearly rate decelerated to 7.0%, both missing consensus estimates. More importantly, the Bank of Canada's Core CPI, which excludes volatile food and energy prices, remained flat on a monthly bases and eased more than expected to a 5.8% YoY rate from 6.1% in July. The data seems to have pushed back expectations for more aggressive policy tightening by the BoC, which, along with subdued action around crude oil prices, continues to undermine the commodity-linked loonie.

The US dollar, on the other hand, builds on its solid intraday bounce from a one-week low and remains well supported by growing acceptance that the Fed will hike rates at a faster pace to tame inflation. This leads to a fresh leg up in the US Treasury bond yields and continues to act as a tailwind for the greenback. Apart from this, the risk-off impulse - as depicted by a weaker tone around the equity markets - provides an additional lift to the safe-haven buck. The combination of the aforementioned factors contributes to the strong bid tone surrounding the USD/CAD pair.

It will now be interesting to see if bulls can capitalize on the move ahead of the highly-anticipated FOMC meeting, starting this Tuesday. The Fed is scheduled to announce its decision on Wednesday and is expected to deliver another 75 bps rate increase. Furthermore, the updated economic projections, the so-called dot plot and Fed Chair Jerome Powell's remarks at the post-meeting press conference will be looked upon for clues about the future rate-hike path. This will play a key role in influencing the USD and provide a fresh directional impetus to the USD/CAD pair.

Technical levels to watch