USD/CAD continues oscillation below 1.3400 ahead of Powell/Macklem’s speech, oil drops further

• USD/CAD is displaying back-and-forth moves, following the footprints of the US Dollar Index.
• Federal Reserve Powell’s speech has become critical after a decline in US economic activities and wage inflation.
• Bank of Canada Macklem’s speech could be hawkish after upbeat December employment data.
• USD/CAD may remain in the grip of bears on a broader note amid declining 20-and 50-EMAs.

USD/CAD is struggling to extend its recovery move from 1.3350 above the immediate resistance of 1.3400 in the early European session. The Loonie asset is displaying a sideways auction as investors are awaiting speeches from Federal Reserve (Fed) chair Jerome Powell and Bank of Canada (BoC) Governor Tiff Macklem for fresh cues.

The market mood has turned risk-averse amid selling interest in risk-perceived assets like S&P500 futures. The 500-stock basket futures have continued their late Monday sell-off mood in the Asian session. Also, a rebound in the 10-year U Treasury yields to near 3.54% has weighed on investors’ risk appetite. The US Dollar Index (DXY) is displaying a lackluster performance below the critical resistance of 103.00 as investors have preferred to remain quiet ahead of the speeches.

Federal Reserve Powell’s speech hogs limelight

The speech from Federal Reserve Powell, which is scheduled for Tuesday, carries significant traction. Investors expect that soaring recession fears led by a slowdown in Services and Manufacturing PMI in the United States and a constructive decline in December’s Average Hourly Earnings might impact the methodology yet designed by Fed Powell and his teammates to combat stubborn inflation.

However, other Fed policymakers are still solid on their prior views. On Monday, San Francisco Fed Bank President Mary Daly dictated that December wage data was one month of data, which can't be declared as a victory. It's too soon to declare victory and stop further interest rate hikes. To tame stubborn inflation, it is reasonable for interest rates to be at 5%-5.25%. Also, Atlanta Fed bank president Raphael Bostic sees interest rate peak in at 5%-5.25%. He further added that the Federal Reserve will continue keeping higher interest rates active into CY2024.

United States Inflation- a key trigger ahead

This week, the show-stopper event will be the United States Consumer Price Index (CPI) data, which will release on Thursday. Considering a firmer drop in wage inflation and a decline in the extent of economic activities, the inflation rate is expected to continue its declining spree. According to Bloomberg, the Labour Department’s CPI is expected to show core inflation at 5.7% from the former release of 6.0%. In the opinion of Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, the US Dollar could stay resilient even with a soft reading.

“The majority of analysts polled by Bloomberg expect that consumer prices will not have risen in December. If that turns out to be correct, we could bet on everything being priced in, with the Dollar not coming under pressure. However, I am not so sure.”

Bank of Canada Macklem’s speech to provide further assistance

The Canadian Dollar is likely to remain on tenterhooks as Bank of Canada Governor Tiff Macklem will deliver a speech on Tuesday. After the release of stronger-than-expected Employment Change and a decline in the Unemployment Rate to 5.0% from the consensus of 5.2% last week, market participants believe that this might escalate wage discussions among firms and job seekers. Bank of Canada’s Macklem could deliver hawkish projections for interest rates as higher employment bills for firms will heat up inflation further.

USD/CAD technical outlook

After a breakdown of stretched consolidation formed in a range of 1.3482-1.3702 on a four-hour, USD/CAD has dropped dramatically to near 1.3350. The range expansion on the south side is expected to continue further as the overall market sentiment is still positive.

Declining 20-and 50-period Exponential Moving Averages (EMAs) at 1.3450 and 1.3510 respectively, add to the downside filters.

Also, the Relative Strength Index (RSI) (14) has shifted into the bearish range of the 20.00-40.00 range, which indicates that a bearish momentum has been activated.

On the oil front, the oil price has extended its downside to near $74.50 despite analysts at Morgan Stanley having raised their forecast for China’s GDP to above 5.0%. A note from Morgan Stanley states that the removal of barriers to the housing/property sectors and recovery from COVID zero will strengthen China's economic recovery, which will solidify prospects starting from the second quarter of CY2023.

It is worth noting that Canada is a leading exporter of oil to the United States and lower oil prices impact the Canadian Dollar.