USD/CAD holds key support of 1.3700 ahead of US Retail Sales

The USD/CAD pair remains well-supported above the round-level cushion of 1.3700 in Tuesday’s European session. The Loonie asset holds gains as the US Dollar (USD) rebounds after a slight corrective move. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains above 105.00 as Federal Reserve (Fed) policymakers continue to advocate for one rate cut this year.

Fed officials have acknowledged the cooler-than-expected consumer and producer inflation reports but don’t want to rush to reduce interest rates before they see inflation declining for months to gain significant confidence.

Contrary to the Fed’s latest interest rate projections, market speculation for two rate cuts this year have strengthened. The CME FedWatch tool shows that the rate-cut process will begin from the September meeting and there will be subsequent rate cuts in the November or December meeting.

Meanwhile, investors shift focus to the United States (US) Retail Sales data for May, which will be published at 12:30 GMT. The Retail Sales data—a key measure of consumer spending—is estimated to have increased by 0.3% after remaining stagnant in April. Robust consumer spending indicates a stubborn inflation outlook and will diminish hopes of rate cuts in September, while soft numbers will do the opposite.

On the Loonie front, rising expectations that the Bank of Canada (BoC) will cut interest rates further in the July meeting have kept the Canadian Dollar on the backfoot. The BoC delivered a rate cut of 25 basis points (bps) in its June policy meeting, as expected. BoC’s preferred inflation measure- the core Consumer Price Index (CPI), which excludes various volatile items- has come down below the 2% target, and the Unemployment Rate has risen to 6.2%, which forced the BoC to start unwinding the restrictive interest rate framework.