USD to CAD Price Forecast: Traders Eyeing US Retail Sales, Canadian CPI Data

Highlights

• US CPI miss weakens the US Dollar.
• Bank of Canada hikes rates, focuses on inflation and labor market.
• Attention turn to US Retail Sales and Canadian CPI figures.

Overview

The recent US Consumer Price Index (CPI) report, showing slower growth, has caught the market by surprise and triggered a broad weakness in the US Dollar. Many had anticipated one last interest rate hike at the July Federal Open Market Committee (FOMC) meeting, but the decline in inflation, along with a robust labor market and increasing consumer sentiment, has further solidified the notion of a soft landing for the economy. Consequently, positive risk sentiment has permeated the markets.

BOC:  Next Rate Decision is Data Dependent

Contrasting the US scenario, the Bank of Canada (BoC) has proceeded with a 25 basis points rate hike as expected. The decision was driven by concerns over persistently high underlying inflation and a tight labor market. Governor Macklem of the Bank of Canada has emphasized their preparedness to implement additional rate hikes, acknowledging that failing to take sufficient action now may require more aggressive measures in the future.

US Retail Sales Report Sets the Tone

Today, market attention will shift towards the US Retail Sales report, while the impact of the Canadian CPI is anticipated to be marginal unless it significantly deviates from expectations. Given the current positive risk sentiment prevailing in the market, a slight deviation from expectations in the US Retail Sales data may exert downward pressure on the US Dollar, interpreted as a healthy cooling effect. Conversely, a substantial miss in the data could unsettle the market, prompting widespread buying of the US Dollar as a safe haven. Additionally, better-than-expected data would likely spur further selling of the US Dollar, supported by the prevailing soft-landing narrative.

Potential Impact of Canadian CPI Downplayed

Looking ahead, Canadian CPI figures are projected to reflect a decrease. Forecasts indicate a CPI of 0.3%, down from the previously reported 0.4%. The Median CPI is expected to register 3.7%, a decrease from the previous 3.9%, while the Trimmed CPI is predicted to reach 3.6%, down from 3.8%. Furthermore, the Common CPI is forecasted at 5.0%, lower than the previously reported 5.2%. It is important to note that last month’s Core CPI stood at 0.4%. These forthcoming figures carry significant potential to influence the Bank of Canada’s policy decisions, consequently affecting the direction of the Canadian Dollar.

On the other hand, the US Core Retail Sales for the previous month are expected to have risen by 0.4%, displaying a faster pace compared to the previously reported 0.1% increase. Similarly, Retail Sales are projected to have increased by 0.5%, surpassing the previous reported growth rate of 0.3%.

Short-Term Outlook:  Strong US Retail Sales to Solidify July Rate Hike

In conclusion, the recent US CPI miss has led to a weakening of the US Dollar, strengthening the soft-landing narrative. The market’s focus now turns to the US Retail Sales report and the impact of the Canadian CPI figures on the Bank of Canada’s policy decisions. These events are likely to shape the near-term direction of major currencies, presenting potential opportunities for traders.

Technical Analysis

The current market sentiment for USD to CAD appears slightly bearish. The 4-hour price is slightly lower than the previous close, indicating a potential weakening of momentum. Both the 200-4H and 50-4H moving averages are above the current price, reinforcing the bearish bias. The 14-4H RSI is neutral, suggesting a balanced momentum.

The main support area is between 1.3118 and 1.3142, while the main resistance area ranges from 1.3360 to 1.3384. These levels can provide crucial reference points. Overall, it looks as if the USD to CAD is trying to reestablish its counter-trend rally. However, success depends on whether buyers can overcome the moving averages.