USD/CAD struggles near two-month low, seems vulnerable below 100-day SMA

• USD/CAD remains on the defensive near a two-month low touched on Wednesday.
• Hopes for a less aggressive Fed, the risk-on mood continues to weigh on the buck.
• An uptick in oil prices underpins the loonie and also contributes to capping the pair.

The USD/CAD pair struggles to gain any meaningful traction and remains confined in a narrow trading band through the early European session. The pair is currently trading around the 1.2770-1.2765 area, just a few pips above a two-month low touched the previous day.

The US dollar meets with a fresh supply and remains well within the striking distance of its lowest level since late June set in the aftermath of softer US consumer inflation figures on Wednesday. This, in turn, is seen acting as a headwind for the USD/CAD pair and capping spot prices near the 100-DMA support breakpoint, turned resistance.

Investors rushed to trim their bets for a larger 75 bps Fed rate hike at the September policy meeting following the release of the weaker-than-expected US CPI report for July. This, along with a softer tone around the US Treasury bond yields and the risk-on impulse in the equity markets, continues to drive flows away from the safe-haven greenback.

Apart from this, an uptick in crude oil prices underpins the commodity-linked loonie and exerts some pressure on the USD/CAD pair. That said, concerns that a global economic downturn could hit fuel demand could keep a lid on the black liquid. This, along with the overnight hawkish remarks by Fed officials, should limit the USD losses.

The mixed fundamental backdrop warrants some caution for bearish traders, though the overnight break below the 100-day SMA for the first time since June supports prospects for further losses. That said, it would still be prudent to wait for some follow-through selling below the post-US CPI low, around mid-1.2700s, before confirming a breakdown.

Market participants now look forward to the release of the US Producer Price Index (PPI), due later during the early North American session. Apart from this, the US bond yields and the broader risk sentiment would drive the USD demand. Traders would also take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair.

Technical levels to watch