USD/CAD rebound eyes 1.2850 amid risk-off mood, softer oil prices ahead of Canada inflation

• USD/CAD portrays corrective pullback from a fortnight low, snaps three-day downtrend.
• Headlines from China, Fedspeak weigh on market sentiment.
• USD rebound stops oil buyers from cheering EU oil embargo fears.
• BOC Core CPI appears crucial amid talks of faster rate hikes, US housing data, risk catalysts will also entertain traders.

USD/CAD prints the first daily gains in four as it grinds near intraday top surrounding 1.2835-40 during early European morning on Wednesday. In doing so, the Loonie pair takes clues from the US dollar rebound, as well as softer oil prices, ahead of the key Consumer Price Index (CPI) data from Canada.

That said, the US Dollar Index (DXY) rises 0.11% intraday to 103.40 while bouncing off a two-week low as market sentiment sours. Also underpinning the US dollar’s recovery are the recently hawkish comments from Chicago Fed President Charles Evans.

A fresh increase in China’s covid cases and Shanghai’s refrain from total unlock joins a reduction in the foreign investment into the Chinese yuan bond seems to have triggered the latest risk-aversion. Also likely to have weighed on the market’s mood could be the headlines conveying the European Commission’s (EC) plan to move away from Russian energy imports.

Additionally, Fed’s Evans said, “(the Fed) Should raise rates to 2.25%-2.5% neutral range 'expeditiously'.” On Tuesday, Fed Chair Jerome Powell and a generally-hawkish St Louis Fed President James Bullard pushed for a 50 bps rate hike and weighed on the USD.

It should be noted that strong prints of the US Retail Sales also seem to help the US dollar regain its charm. That said, the US Retail Sales rose at a pace of 0.9% MoM in April, slightly better than the expected pace of 0.7% but softer than the upwardly revised 1.4% growth (from 0.5%).

Amid these plays, the US 10-year Treasury yields dropped 0.5 basis points (bps) to 2.966% whereas the S&P 500 Futures decline 0.40% intraday even as Wall Street posted heavy gains. Further, WTI crude oil drops back below $111.00, down 0.50% intraday near $110.50 at the latest.

Looking forward, Canada’s headline CPI is likely to ease to 0.5% MoM from 1.4% and may help the USD/CAD to remain firmer. However, major attention will be given to Bank of Canada CPI Core readings, expected 5.4% YoY versus 5.5% prior. Should the inflation data remain softer, the BOC will have less urgency towards tighter monetary policy than the Fed, which in turn could favor the USD/CAD bulls. Additionally, US Housing Starts and Building Permits for April will join Fedspeak to offer additional directives.

Technical analysis

USD/CAD remains below the upward sloping resistance line from late April, around 1.2945 by the press time, which in turn keeps the pair sellers hopeful amid bearish MACD signals and downbeat RSI (14).