USD/CAD rebounds from 1.3470 as USD Index recovers amid a holiday-truncated week

• USD/CAD finds cushion near 1.3470 amid a recovery in the USD Index.
• Fed policymakers see a one-time decline in the inflation data as insignificant.
• The Canadian Dollar will be guided by the inflation data for January.

The USD/CAD pair attempts to rebound after discovering buying interest near 1.3470 in Monday’s early New York session. The Loonie asset has found support as the US Dollar Index (DXY) has recovered from a five-day low of 104.15.

Investors see a subdued trading action ahead as US markets are closed because of Presidents’ Day. The USD Index, which measures the value of the Greenback against six major currencies, has rebounded as traders have pared bets in favor of rate cuts by the Federal Reserve (Fed) in Many monetary policy meetings.

After losing confidence over rate cuts in March due to persistent price pressures in the US economy, investors have shifted expectations for the commencement of the rate-cut cycle from the May to June policy meeting. On Friday, the US Producer Price Index (PPI) data for January rose sharply due to a rise in medical costs and portfolio management fees.

While investors are worried about the stubborn inflation outlook, Fed policymakers said considering one-time fluctuation could be a tremendous mistake. Investors should focus on longer trend, which indicates that inflation is declining towards the 2% goal.

Going forward, investors will focus on the Federal Reserve Open Market Committee (FOMC) minutes for January’s policy meeting, which will be released on Wednesday. The FOMC minutes will provide a detailed explanation behind keeping key rates unchanged in the range of 5.25%-5.50% in January and a fresh outlook on interest rates.

On the Canadian Dollar front, investors await the inflation data for January, which will be published on Tuesday. As per the estimates, the core Consumer Price Index (CPI) data is anticipated to decline to 3.2% from 3.4% in December. The Bank of Canada (BoC) may continue to hold interest rates at 5% as policymakers need to do more work to bring down inflation to the 2% target.