USD/CAD drops back below 1.3600 despite sluggish Oil price as BoC vs. Fed play tease bears

• USD/CAD fails to defend the first daily gains in four, retreats towards monthly low.
• Oil price remains sidelined after reversing from two-week top; market sentiment dribbles.
• BoC’s Gravelle appears more hawkish than Fed talks.
• Canada GDP, US inflation clues eyed for clear directions.

USD/CAD reverses from intraday while paring the first daily gains in four around 1.3565 heading into Thursday’s European session. In doing so, the Loonie pair justifies hawkish comments from Bank of Canada (BoC) officials while paying a little heed to the lackluster prices of WTI crude Oil, Canada’s key export earner.

BoC Deputy Governor Toni Gravelle said on Wednesday that the BOC is ready to act in the case of severe market-wide stress and provide liquidity support to the financial system. The policymaker also added that the Quantitative Tightening (QT) program will likely end sometime around the end of 2024 or the first half of 2025; QT is working but will take some time to run its course.

On the other hand, Fed Chair Jerome Powell’s teasing of one more rate hike joined Fed Vice Chair for Supervision Michael Barr’s emphasis on data dependency to test the market’s previous optimism. On the same line could be Fed Chair Powell’s push for alteration in deposit insurance. As a result, the Fed hawks do flex their muscles but wait for more clues and amplify the market’s anxiety ahead of Friday’s key inflation gauge from the US, namely the Core Personal Consumption Expenditure (PCE) Price Index.

That said, WTI Crude oil treads water around $73.00 after snapping a two-day uptrend while reversing from a fortnight high the previous day. It should be noted that the market’s cautious mood ahead of the top-tier data/events joins the US Dollar rebound to weigh on the Oil price even as supply crunch fears and inventory draw keep the energy buyers hopeful.

Also likely to challenge the market sentiment is China Premier Li Qiang’s dislike for trade protectionism and decoupling, which indirectly targets the US, as well as the North Korean and Russian tactics over nuclear power usage.

Furthermore, the majority of the central bankers defend their previous bias about inflation and hence propel yields amid economic fears. Additionally, International Monetary Fund’s (IMF) Managing Director Kristalina Georgieva said on Thursday, “Urgently need faster, more efficient mechanisms for providing debt support to vulnerable countries.” Her comments renew banking fears which eased previously.

Against this backdrop, the US Dollar Index (DXY) clings to mild gains while S&P 500 Futures struggled around a one-week high marked the previous day. Further, the US 10-year and two-year Treasury bond yields grind higher after teasing the bond buyers the previous day.

Looking forward, the US fourth quarter (Q4) Core Personal Consumption Expenditure (PCE) and final prints of the Q4 Gross Domestic Product (GDP) can entertain Loonie pair traders. However, major attention should be given to Friday’s Fed’s preferred inflation gauge, namely the US Core PCE Price Index, as well as Canada’s monthly GDP data.

Technical analysis

USD/CAD bears stay in the driver’s seat unless the quote marks a daily closing beyond the 50-day Exponential Moving Average (EMA) surrounding 1.3600.