USD/CAD sees a downside to near 1.3350 amid a cheerful market mood and firmer oil prices

• USD/CAD is displaying a balanced market after a downside momentum.
• Cheerful market mood amid expectation of slowdown in Federal Reserve rate hike pace has impacted the US Dollar.
• Firmer oil prices amid growing supply worries have supported the Canadian Dollar.
• USD/CAD is expected to deliver more downside amid anxiety ahead of the FOMC minutes release.

USD/CAD has turned sideways in the early Asian session after a breakdown of the critical support of 1.3380. The asset witnessed a significant fall on Tuesday after a significant recovery in the risk-on profile. The risk-on profile regained traction as investors chose optimism after remaining uncertain over the economic projections led by Covid-19 worries in China. Also, the market participants are hoping that the holiday season due to Christmas festivities could slow down inflation due to a decline in economic activities.

Meanwhile, the US Dollar Index (DXY) witnessed a vertical fall after failing to recapture the critical hurdle of 108.00. The mighty US Dollar became the victim of a significant improvement in investors’ risk appetite as its three-day winning streak got concluded. Going forward, the US Dollar is expected to remain on tenterhooks as the release of the United States Durable Goods Orders data and the Federal Open Market Committee (FOMC) minutes.

S&P500 witnessed significant gains on Tuesday amid a cheerful market mood. While the returns on US government bonds continued their downside journey amid chatters over a further slowdown in inflation as economic activities and demand for durable goods will hit in the upcoming festive season. The 10-year US Treasury yields have dropped to 3.76%.

United States Durable Goods Orders and FOMC minutes eyed

The risk-perceived currencies have gained traction in the current scenario, however, the optimism could get faded as the release of the United States Durable Goods Orders and the Federal Open Market Committee (FOMC) could infuse volatility in the global markets. As per the projections, the US Durable Goods Orders will land at 0.4%, similar to their prior release. A continuation of an improvement in demand for durable goods could push the prolonged efforts of the Federal Reserve (Fed) policymakers into vain. Federal Reserve chair Jerome Powell is putting his blood and sweat to trim consumer spending and a steady improvement in the demand for durable goods could get things back to the square.

On Thursday, the release of the FOMC minutes will provide detailed reasoning behind the announcement of the fourth consecutive 75 basis points (bps) rate hike. To combat mounting inflation, the Federal Reserve is continuously hiking interest rates. Exhaustion in the inflation pressures has been witnessed by the market participants. The headline inflation has already lowered to 7.7% from the peak of 9.1% and more rate hikes by the Federal Reserve would keep the inflation rate in check. Apart from that, interest rate guidance and current economic and financial prospects will be keenly watched.

Bank of Canada is set to return to a period of low inflation and solid growth

Due to escalating inflation, the Bank of Canada (BOC) has been continuously escalating interest rates. The headline inflation has also dropped to 6.9% after showing a peak at 8.1% in June. Senior Deputy Governor Carolyn Rogers is very much confident about a further slowdown in the inflationary pressures and cited that higher interest rates have started to slow the Canadian economy, putting pressure on households with elevated debt, said in a speech at the University of Ottawa. She further added that "It will take time to get back to solid growth with low inflation but we will get there,"

On Tuesday, Canada’s Retail Sales data dropped sharply by 0.5% vs. an expansion of 0.4% reported earlier. This indicates a sheer slowdown in consumer spending, which may add to the downside filters of the price rise index. Going forward, the speech from Bank of Canada Governor Tiff Macklem will remain in focus. The Bank of Canada Governor is expected to provide interest rate guidance and inflation projections to fade anxiety among market participants.

Firmer oil prices support the Canadian Dollar

Oil prices have displayed a V-shape recovery on a broader note after chatters over intervention by the OPEC+ in the oil market to support oil prices from its imbalanced movements got confirmed after Saudi Energy Minister said that the current OPEC+ deal will continue till the end of 2023. Earlier, the oil exporting countries agreed to cut production of oil by two million barrels each day to boost oil prices. The move is likely to disturb the current demand-supply mechanism, therefore, the oil prices are shaping themselves to turn efficient. The oil prices have recovered above $81.00 after printing a fresh 11-month low at $75.27. Also, a consecutive drop in oil stockpiles by the United States for the week ending November 18 has strengthened oil prices. The United States American Petroleum Institute (API) has reported a decline in oil inventories by 4.8 million barrels. It is worth noting that Canada is a leading exporter of oil to the United States and a significant jump in oil prices has a positive impact on the Canadian dollar.

USD/CAD technical outlook

USD/CAD has witnessed immense selling pressure after attempting to cross the mighty 200-period Exponential Moving Average (EMA) at the psychological resistance of 1.3500 on a four-hour scale. The asset has also dropped below the 20-period EMA at 1.3390, which has turned the short-term momentum in the favor of the Canadian Dollar. A downside move would find cushion around the horizontal support plotted from September 1 high at 1.3208.

Meanwhile, the Relative Strength Index (RSI) (14) has failed to sustain above the bullish range of 60.00-80.00, which indicates that investors are capitalizing rallies for adding shorts.