The USD/CAD pair remains well-supported above the crucial 1.3700 mark during Tuesday’s European session. The Canadian Dollar (Loonie) maintains its gains as the US Dollar (USD) rebounds from a slight correction. The US Dollar Index (DXY), which measures the Greenback against six major currencies, stays firm above 105.00. This strength comes as Federal Reserve (Fed) officials continue to advocate for one rate cut this year despite acknowledging recent cooler-than-expected consumer and producer inflation reports.
Fed policymakers have stressed the need for sustained evidence of declining inflation before reducing interest rates, preferring to wait for months of consistent data before taking action. However, market expectations diverge, with speculation for two rate cuts this year gaining traction. The CME FedWatch tool indicates that the rate-cut process might start in the September meeting, followed by further cuts in either November or December.
Attention now shifts to the upcoming US Retail Sales data for May, scheduled for release at 12:30 GMT. This data is a key indicator of consumer spending and is expected to show a 0.3% increase after a stagnant April. Strong consumer spending could signal persistent inflation pressures, reducing the likelihood of rate cuts in September. Conversely, weaker figures might bolster hopes for earlier rate reductions.
On the Canadian front, the Loonie is pressured by rising expectations that the Bank of Canada (BoC) will further cut interest rates in its July meeting. The BoC already implemented a 25 basis points (bps) rate cut in June, responding to its core Consumer Price Index (CPI) falling below the 2% target and an increase in the unemployment rate to 6.2%. These economic indicators prompted the BoC to start easing its restrictive interest rate policies.
In summary, while the USD/CAD pair remains buoyed by a strong USD and mixed rate-cut expectations from the Fed, the Canadian Dollar faces headwinds from anticipated further rate cuts by the BoC, driven by weakening domestic economic indicators.
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