USD/CAD drops to 1.2600 mark in reaction to weaker US CPI report

• A combination of factors dragged USD/CAD lower for the second successive day.
• Rising oil prices underpinned the loonie and acted as a headwind for the major.
• Softer US CPI report weighed on the USD and contributed to the intraday selling.

The USD/CAD pair witnessed some selling during the early North American session and dropped to the 1.2600 neighbourhood, or two-day lows in reaction to the softer-than-expected US CPI report.

Following a brief consolidation through the first half of the trading action on Tuesday, the USD/CAD pair met with some fresh supply and turned lower for the second successive day. WTI crude oil shot to the highest level since August 3 – closer to the $71.00/barrel mark – and underpinned the commodity-linked loonie.

On the other hand, the US dollar extended the previous day's retracement slide and dropped to one-week lows following the release of the US consumer inflation figures. The headline CPI missed expectations and decelerated to 0.3% in August from 0.5% in the previous month. On yearly basis, the CPI edged lower to 5.3%, as anticipated.

Meanwhile, core inflation, which excludes food and energy prices, fell short of consensus estimates and recorded a modest 0.1% rise during the reported month. More importantly, the yearly core CPI fell to 4% from 4.3% in July and dashed hopes for an imminent Fed taper announcement at the upcoming policy meeting on September 20-21.

This was evident from a modest intraday pullback in the US Treasury bond yields. Apart from this, the underlying bullish sentiment in the financial markets might further act as a headwind for the safe-haven greenback. The fundamental backdrop favours bearish traders and supports prospects for further downside for the USD/CAD pair.

However, hopes that the Fed would eventually begin rolling back its massive pandemic-era stimulus later this year could lend some support to the greenback. This makes it prudent to wait for some follow-through selling below last Friday's swing lows, around the 1.2585-80 region, before placing aggressive bearish bets.

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