• USD/CAD is facing hurdles in stretching its recovery above 1.3740, volatility is expected ahead of US Inflation.
• Federal Reserve could continue a smaller rate-hike regime to avoid the United States recession.
• Bank of Canada may be required to resume its policy-tightening process to tame inflation recovery.
• USD/CAD might display a downside momentum if RSI (14) skids into the bearish range of 20.00-40.00.

The USD/CAD pair is facing barricades while extending its recovery above the immediate resistance of 1.3740 in the early European session. A sideways performance is expected from the Loonie asset till the release of the United States Consumer Price Index (CPI) data. Earlier, the asset rebounded after a five-day low of 1.3677 as investors got anxious ahead of the US inflation release and improved appeal for safe-haven assets.

The US Dollar Index (DXY) is displaying a back-and-forth action below 104.00. It seems that the USD Index is gathering strength to stretch its recovery as the release of the US Inflation will prepare the ground for the interest rate decision from the Federal Reserve (Fed), which is scheduled for next week. S&P500 futures are attempting to hold gains generated in the Asian session.

However, the risk appetite is still weak as global stocks are facing the heat of the Silicon Valley Bank (SVG) collapse. The return delivered on 10-year US Treasury bonds has rebounded to near 3.57% on hopes that US inflation data could fuel safe-haven's appeal.

Upside risk for US inflation looks favored

The major catalyst of the week- US inflation, will release on Tuesday and is expected to deliver a power-pack action in the FX domain. Considering the resilience in the overall demand, strong employment bills, and upbeat strong labor market, an acceleration in the US inflationary pressures cannot be ruled out. Last week, the US Bureau of Labor Statistics reported a significant jump in the number of payrolls generated by the US economy in February than anticipated. The Unemployment Rate increased to 3.6%. And, Average Hourly Earnings were increased to 4.6%, lower than the consensus of 4.7%.

Despite an increase in the jobless rate, the US labor market looks upbeat as firms are continuously escalating their recruitment process to add more people. And, employment bills are still in a rising trend, which indicates that households are equipped with sufficient funds to trigger inflation again.

Analysts at Wells Fargo expect “Another monthly increase of 0.4% in the overall CPI in February, which would put the annual rate at 6.0%. We still see inflation set to grind lower, but the process is likely to be bumpy and take time. Despite some directional improvement over the past couple of quarters, prices are still growing well above the Fed's 2% target, and the tight labor market suggests that there are still inflationary pressures that could forestall a full return to 2% inflation.”

Upbeat labor market to compel Bank of Canada to rollback rate-hiking process

The Bank of Canada (BoC) has already confirmed that the current monetary policy is restrictive enough to contain Canadian inflation. BoC Governor Tiff Macklem decided to allow the current monetary policy to display its potential and has therefore kept monetary policy steady in March. However, a surprise increase in the Employment numbers and higher employment cost index indicate that inflation could be propelled again. Along with an unchanged monetary policy, Bank of Canada Tiff Macklem kept the room open for more rates if inflation surprises to the upside.

Meanwhile, oil prices have witnessed a sell-off as the street is worried about the overall demand ahead. It is worth noting that Canada is a leading exporter of oil to the US and lower oil prices would impact the Canadian dollar.

USD/CAD technical outlook

USD/CAD has delivered a sheer downside move after a breakdown of the Head and Shoulder chart pattern formed on a two-hour scale. The asset rebounded but has now found barricades near the horizontal resistance plotted from March 08 low at 1.3745. The US Dollar bulls are expected to find a cushion near support placed from March 01 high at 1.3659.

The 20-period Exponential Moving Average (EMA) at 1.3745 is expected to act as a major resistance for the US Dollar.

Meanwhile, the Relative Strength Index (RSI) (14) is oscillating in the 40.00-60.00 range. A breakdown into the bearish range of 20.00-40.00 will trigger the downside momentum.