USD/CAD rebounds from multi-month low, upside potential seems limited

• USD/CAD gains some positive traction on Wednesday, albeit lacks follow-through buying.
• Bullish Crude Oil prices, along with stronger Canadian CPI, continue to benefit the Loonie.
• Fed rate cut bets and the risk-on mood undermine the USD and cap the upside for the pair.

The USD/CAD pair stages a modest bounce from its lowest level since August 4, around the 1.3330 area touched earlier during the Asian session on Wednesday and recovers a part of the previous day’s Canadian CPI-inspired losses. Spot prices currently trade just below mid-1.3300s, up 0.10% for the day, though any meaningful appreciating move still seems elusive.

Data released on Tuesday showed that the annual consumer inflation rate in Canada unexpectedly held steady at 3.1% in November, prompting traders to trim their bets as to when the Bank of Canada (BoC) would start cutting interest rates. This, along with the recent goodish recovery in Crude Oil prices from the lowest level since late June touched earlier this month, might continue to underpin the commodity-linked Loonie. Apart from this, the underlying bearish sentiment surrounding the US Dollar (USD) might further contribute to capping the USD/CAD pair.

The Federal Reserve (Fed) took a dovish turn last week and projected an average of three 25 bps rate cuts in 2024. This, along with the prevalent risk-on environment, keeps the safe-haven Greenback closer to over a four-month low touched last Friday. Meanwhile, a slew of influential Fed officials recently attempted to downplay speculations about an imminent dovish shift in the US central bank’s policy stance, albeit did little to impress the USD bulls. This, in turn, validates the negative outlook for the USD/CAD pair and warrants some caution for bullish traders.

Market participants now look to the US economic docket, featuring the release of the Conference Board’s Consumer Confidence Index and Existing Home Sales data. This, along with Chicago Fed President Austan Goolsbee’s appearance, will drive the USD demand later during the North American session and provide a fresh impetus to the USD/CAD pair. Apart from this, Oil price dynamics should allow traders to grab short-term opportunities. The focus, however, will remain glued to the US Core PCE Price Index – the Fed’s preferred inflation gauge – due on Friday.

Technical levels to watch