- USD/CAD remains on the margin above 1.3700 amid uncertainty over the timing of Fed rate cuts.
- US customers have significantly reduced discretionary spending, indicating a decline in purchasing power.
- Canadian retail sales are expected to return to a positive path.
The USD/CAD pair is trading in a narrow range, but is comfortably holding the key support at 1.3700 during Wednesday’s European session. Loonie assets are consolidating amid uncertainty about the path of Federal Reserve (Fed) rate cuts due to the discrepancy between the Fed’s projections and market expectations of how much interest rates will be cut this year.
In the latest scatterplot, Fed policymakers signaled one rate cut this year. Financial markets are definitely expecting two, however, as the latest US Consumer Price Index (CPI) report for May indicated that the disinflation process has resumed. Additionally, retail sales for May indicated that consumers significantly reduced discretionary spending. This has strengthened confidence among investors that inflation is gradually falling towards the 2% target.
Meanwhile, Fed officials want inflation to decline for several months before considering interest rate cuts. Improved expectations for Fed interest rate cuts restricted the growth of the US dollar (USD). The US Dollar Index (DXY), which tracks the dollar’s value against six major currencies, is hovering around 105.20.
On the Loonie front, investors are awaiting Canadian retail sales data for April, which will be released on Friday. Monthly retail sales are expected to return to a positive trajectory after sinking for three straight months. Economic data is estimated to have increased by 0.7%.
USD/CAD has continued to consolidate in the 1.3600-1.3800 range for almost seven weeks. The Loonie asset maintains a 200-day exponential moving average (EMA) that is hovering around 1.3690, suggesting that the overall trend is bullish.
The 14-period Relative Strength Index (RSI) is oscillating in the range of 40.00-60.00, indicating indecision among market participants.
A recent buying opportunity would arise if the asset breaks through the April 17 high of 1.3838. This would take the asset to a November 1, 2023 high of 1.3900, followed by psychological resistance at 1.4000.
In the alternative scenario, a break below the June 7 low at 1.3663 will expose the asset to the May 3 low around 1.3600 and the April 9 low around 1.3547.
