USD/CAD struggles to surpass 1.3440, traces footprints of USD Index ahead of US Inflation

• USD/CAD is facing hurdles in surpassing the 1.3440 resistance amid lackluster trading activities.
• The Lonnie asset is following the footprints of the US Dollar Index, which has turned sideways ahead of US inflation.
• The street is expecting further softening of the US price index led by declining gasoline prices.

The USD/CAD pair is displaying a sideways auction in a 1.3404-1.3440 range in the Asian session. The Loonie asset is unable to find any direction as investors have restricted themselves from building potential positions till the release of the United States inflation data. Also, the major is following the footprints of the US Dollar Index (DXY).

The US Dollar Index has shifted its auction profile below 102.80 as investors are surrendering the safe-haven assets amid rising expectations for further softening of the Consumer Price Index (CPI). The USD Index is weighing down by the rising demand for US Treasury bonds. This has led to a fall in the 10-year US Treasury yields to 3.52%. Meanwhile, the risk profile still seems positive as the S&P500 futures are showing a marginal fall after two back-to-back bullish trading sessions.

It is highly likely that the release of the US inflation data will result in a power-pack action in the FX domain. Considering the consensus, the US, inflation is clearly on the retreat. From its peak of 9.1% in June, the YoY rate most recently fell to 7.1% in November. For December, we forecast a further decline to 6.4%. Used car prices are likely to have fallen by almost 3% in December from November, as reported by Commerzbank. Also, the Core inflation rate to decrease from 6.0% to 5.6%.

Further softening of the US price index will force the Federal Reserve (Fed) to pen down its monetary policy blueprint again, which will release in the first week of February. It might force Fed chair Jerome Powell to look for a smaller interest rate hike in their long-time fight against stubborn inflation.

On the oil front, oil prices have soared vertically to near $78.00 as the Chinese economy is reopening at a sheer pace of scale. This has led to an upward revision of Gross Domestic Product (GDP) projections for the Chinese economy. It is worth noting that Canada is a leading exporter of oil to the United States and higher oil prices might support the Canadian Dollar.