During the early European trading hours on Monday, the USD/CAD pair encounters resistance below the 1.3400 level. The subdued performance of the pair is attributed to the weakening US Dollar (USD) and a softer-than-expected US Producer Price Index (PPI) report. As of now, the pair hovers around 1.3391, reflecting a 0.19% gain for the day.
The downtick in the pair is fueled by elevated expectations of Federal Reserve (Fed) easing. Market sentiment, as reflected in the WIRP, indicates an approximately 85% probability of a rate cut at the Fed’s March meeting, up from 75% at the beginning of the previous week. Moreover, the swaps market suggests expectations of almost 175 basis points (bps) of Fed easing in the current year, compared to less than 150 bps at the start of the previous week. Investors keenly await the US December Retail Sales data on Wednesday for further insights, with the headline figure projected to show a month-on-month increase of 0.4%.
On the Canadian front, the Bank of Canada (BoC) is widely anticipated to initiate interest rate cuts this year following a series of rate hikes. The first rate cuts may occur as early as this spring, with a rate cut fully priced in for the April meeting, according to WIRP. Approximately 150 bps of total rate cuts are priced in for this year. Tuesday’s release of the Canadian Consumer Price Index (CPI) for December is expected to provide clues about further BoC monetary policy, with headline inflation anticipated at 3.3% year-on-year.
Monday’s agenda includes the release of Canadian Wholesale Sales, Manufacturing Sales, and the Bank of Canada Business Outlook Survey. Attention will then shift to the December US Retail Sales data on Wednesday, guiding traders in identifying potential opportunities within the USD/CAD pair amidst divergent central bank expectations.
