USD/CAD eyes fresh downside below 1.3650 as Fed to sound less-hawkish, Canada CPI eyed

• USD/CAD is likely to deliver a fresh downside below 1.3650 amid a weaker USD Index and oil price recovery.
• Led by the declining US inflation, Fed Powell might look for achieving the terminal rate with the least pace.
• Further softening of Canadian inflation would delight the Bank of Canada.

The USD/CAD pair is demonstrating a back-and-forth action around the critical support of 1.3650 in the early Tokyo session. The Loonie asset is expected to deliver a fresh downside as investors are expecting Federal Reserve (Fed) chair Jerome Powell to sound less hawkish on interest rates.

Deepening fears of a potential global banking fiasco after the collapse of three United States-based commercial banks and the second-largest Swiss banking firm Credit Suisse are bolstering the case of a 25 basis point (bps) rate hike by the Fed. Apart from that, the dot plot for further rate hikes will be keenly watched.

There is no denying the fact that the US inflation is in a declining trend, therefore, Fed Powell might look for achieving the terminal rate with the least pace.

S&P500 futures showed a decent recovery on Monday after the mayhem in the last week, portraying a revival in the risk appetite of the market participants. The US Dollar Index (DXY) has ended in negative straight for the third trading session amid a weak safe-haven appeal due to banking shakedown.

Analysts at ING believe “We do not expect too much volatility if conditions allow the Fed to hike 25 bps and the dot plots do not surprise too much and an unlikely 50 bps hike would be very bullish for the Dollar.”

Meanwhile, the Canadian Dollar is expected to remain in action amid the release of the Consumer Price Index (CPI) data. Economists at TDS Securities cited “We look for CPI to continue trending lower to 5.3% YoY as core measures soften to 4.8%. Base effects will play a large role with prices up 0.5% MoM, but energy prices will also exert a drag. This would leave Q1 CPI tracking slightly below the January MPR, but we would note the evolution of financial sector vulnerabilities will be the larger factor for the near-term Bank of Canada (BoC) outlook.”

On the oil front, oil price showed significant recovery after a fresh 15-month low at $64.32 on expectations that OPEC could intervene amid falling prices. The black gold has recovered to near $67.70 and is eyeing the interest rate decision by the Fed for further guidance.