USD/CAD stalls Tuesday's pullback from over two-month high, flat lines around 1.3775

• USD/CAD bulls remain on the defensive amid a modest USD pullback from a two-month top.
• Expectations for a less aggressive Fed policy easing to limit losses for the USD and the major.
• Bets for a larger BoC rate cut and weaker Crude Oil prices could also offer support to the pair. 

The USD/CAD pair struggles to capitalize on a modest Asian session uptick on Wednesday and remains below its highest level since August 6, around the 1.3835-1.3840 region touched the previous day. Spot prices currently trade around the 1.3775 region, nearly unchanged for the day, though the fundamental backdrop supports prospects for an extension of the recent strong rally witnessed over the past three weeks or so.

The US Dollar (USD) eases from over a two-month high touched earlier this week and turns out to be a key factor acting as a headwind for the USD/CAD pair. That said, any meaningful USD corrective decline still seems elusive in the wake of firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and a regular 25 basis points (bps) interest rate cut in November. Apart from this, bets for a larger, 50 bps rate cut by the Bank of Canada, bolstered by softer domestic consumer inflation figures, might continue to weigh on the Canadian Dollar (CAD) and offer some support to the currency pair. 

A report from Statistics Canada released on Tuesday showed that the headline Consumer Price Index (CPI) contracted by 0.4% in September and the yearly rate decelerated from 2.0% in August to 1.6%. This marks the smallest annual increase since February 2021 and raises hopes for a larger-than-usual BoC rate cut next week. Furthermore, a bearish sentiment around Crude Oil prices, led by easing fears of supply disruptions from the Middle East, could undermine the commodity-linked Loonie. This, in turn, validates the positive outlook for the USD/CAD pair and suggests that the path of least resistance remains to the upside. 

Even from a technical perspective, the Relative Strength Index (RSI) eased from slightly overbought conditions on the daily chart and supports prospects for the emergence of some dip-buying at lower levels. Hence, it will be prudent to wait for strong follow-through selling before confirming that the USD/CAD pair has topped out in the near term and positioning for any meaningful corrective decline. Traders now look to the Canadian economic docket – featuring the release of Manufacturing Sales and Housing Starts. Apart from this, the USD and Crude Oil price dynamics should provide some impetus to the currency pair.