• USD/CAD drops from 1.3510 as USD Index declines ahead of FOMC minutes.
• Canadian inflation is expected to have eased in January.
• USD/CAD drops to near the lower border of the Rising Channel pattern.

The USD/CAD pair faces a sharp sell-off while attempting to extend upside above the immediate resistance of 1.3510 in Tuesday’s European session. The Loonie asset falls back due to a sharp decline in the US Dollar Index (DXY).

The USD Index retreats to near a two-day low around 104.10 as the impact of stubborn consumer price inflation data for January has faded. Federal Reserve (Fed) policymakers have said that the one-time surprise in the inflation data should not be given much priority. The focus should be on the longer-term trend, which indicates that inflation is moving in the right direction.

This week, the Federal Open Market Committee (FOMC) minutes for the January monetary policy meeting will be in focus. In the last monetary policy statement, Fed Chair Jerome Powell said that we need more evidence for considering rate cuts, which could convince us that inflation will return to the 2% target.

On the Canadian Dollar front, investors await the inflation data for January, which will be published at 13:30 GMT. Economists expect the annual Canadian CPI to rise by 3.3% in January, slowing from a 3.4% growth recorded in December. The monthly inflation data is seen rebounding to 0.4% in the same period after declining 0.3% in December. Signs of decelerating price pressures would escalate hopes of early rate cuts by the Bank of Canada (BoC).

USD/CAD trades in a Rising Channel chart pattern on a four-hour scale in which market participants consider each pullback a buying opportunity. The aforementioned chart pattern demonstrates an upside trend in a bounded region. The major has dropped near the 50-period Exponential Moving Average (EMA), which trades around 1.3490.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 region, which indicates indecisiveness among market participants.

The fresh upside would emerge if the Loonie asset climbed above the January 17 high at 1.3542, which will drive the asset towards the round-level resistance of 1.3600, followed by the November 30 high at 1.3627.

On the flip side, a sell-off could appear if the Loonie asset drops below January 31 low at 1.3359. This will expose the asset to January 4 low at 1.3318 and January 5 low at 1.3288