USD/CAD returns to 1.22 after US-CPI led upsurge

The USD/CAD pair spiked to a fresh weekly high at 1.2240 with the first reaction to the higher-than-expected consumer inflation growth in the U.S. but quickly erased its gains to return to the 1.22 handle. As of writing, the pair was trading at 1.2208, up 0.3% on the day.

Today's data from the U.S. revealed that the Consumer Price Index for All Urban Consumers (CPI-U), increased by 0.4% in August after coming in at 0.1% in July and bear the market estimate of 0.3%. Moreover, consumer inflation growth on a yearly basis advanced to 1.9% from 1.7%. The US Dollar Index jumped to its best level at 92.66 since September 5 minutes after the release but struggled to stretch this move and was last seen at 92.40, where it closed the previous day.

• US: CPI for all items rises 0.4% in August as shelter and gasoline indexes increase
• US: Weekly initial claims was 284,000, a decrease of 14,000 from previous week

The fact that the Fed favors the core PCE price index as a measure of inflation over the CPI may have limited the intensity of the reaction to today's data. On the other hand, crude oil prices continue to extend their gains for the fourth day in a row with the barrel of West Texas Intermediate surpassing the $50 threshold for the first time in more than a month, allowing the commodity-linked loonie to stay resilient against its peers.

Technical outlook

With a decisive break above 1.2300 (psychological level), the pair could aim for 1.2350 (20-DMA) and 1.2425 (Sep. 4 high). On the downside, support could be encountered at 1.2160 (daily low), 1.2080 (Apr. 27, 2015, low) and 1.2000 (psychological level). The RSI indicator on the H4 chart stays above the 50 mark and is now moving higher towards the 70 handle, suggesting that the bullish momentum is building up in the near-term.