The CAD weakened against the USD ahead of the key release of Canadian CPI data. The better-than-expected US retail sales growth rate for March, reduced Fed rate cut expectations and geopolitical risks benefitted the USD and weighed on the CAD/USD pair. At the same time, the increase in oil prices has lent support to the Loonie and limited further gains for the USD.
Fed expected to delay rate cuts
Expectations that the Fed will delay interest rate cuts due to persistent inflation have pushed the USD Index (DXY), which tracks the greenback against a basket of currencies, higher to over a five-month top. Additionally, the positive US retail sales which were out on Monday have demonstrated that consumer spending remains robust which could help keep inflation higher. This in turn will encourage the Fed to keep interest rates higher for longer.
Geopolitical tensions weigh on market sentiment
The gloomy tone in the equity markets due to the ongoing geopolitical tensions has also supported the safe-haven greenback and weakened the Loonie.
Following Iran’s weekend missile and drone attack, Israel’s military chief has said the country will respond to Iran’s attack, but what to expect and whether it will lead to a full-scale regional war, remains unclear. The news has pushed Crude Oil prices higher after experiencing a two-week low, and could further boost the commodity-linked Loonie.
Canada’s inflation data: what to expect
The latest inflation report from Canada for March will be released by Statistics Canada at 8:30 am ET. Economists anticipate that the Consumer Price Index may have increased in March, partly as a result of higher gasoline prices. The CPI report is the first of two reports before the Bank of Canada’s interest rate decision in June. Policymakers and investors will scrutinise the report as it could influence the bank’s decision regarding rate cuts.
The Canadian economy has slowed down due to higher interest rates, while inflation has cooled. The adverse effects of higher interest rates were more sharply felt in Canada than in the US and many analysts expect the Bank of Canada to start cutting rates in June. There is almost a 50% chance that the BoC will cut rates in June which means that it may reduce rates earlier than the Fed. If this happens, the CAD will be in a weaker position than the greenback.
Looking ahead
All eyes will turn towards the release of the Canadian consumer inflation figures, which will be released later during the early North American session. From the US, market participants will focus on the release of housing market data and Industrial Production figures. A number of speeches by Fed policymakers including Fed Chair Jerome Powell, and the wider risk sentiment will influence demand for the USD. Oil price dynamics will also impact the CAD/USD pair and provide trading opportunities to market participants in the short-term.