The USD/CAD currency pair posted modest gains during Thursday’s early Asian session, advancing toward the 1.3685 level, as traders digest the latest Canadian inflation data and US wholesale price indicators, with attention turning next to upcoming US Retail Sales figures. 

The balance between diverging expectations from the Bank of Canada (BoC) and the Federal Reserve (Fed) continues to be the dominant driver in the foreign exchange market, offering potential volatility triggers for the North American pair. Fletrade’s brokers break down this topic thoroughly in their latest analytical piece.

Mild Gains Amid Mixed Economic Signals

The USD/CAD pair is trading around 1.3685, reflecting a slightly bullish bias as the Canadian Dollar (CAD) finds some support from reduced expectations of imminent BoC rate cuts. At the same time, a weaker-than-expected US PPI (Producer Price Index) tempers US Dollar (USD) strength, leading to subdued price action ahead of key macroeconomic data releases.

On Tuesday, Statistics Canada reported that the nation’s Consumer Price Index (CPI) increased 1.9% year over year (YoY) in June, up from May’s 1.7%. This acceleration in headline inflation pushed market participants to reconsider their assumptions regarding the BoC’s monetary policy path, especially with its July 30 rate decision approaching. 

Before the CPI release, traders had priced in a 14% probability of a rate cut. That figure has now dropped to 5%, implying growing expectations that the BoC will maintain its key interest rate at 2.75%.

PPI Softness Reflects Easing US Inflationary Pressures

On the US side, Wednesday’s Producer Price Index report showed zero monthly growth for June, falling short of the 0.2% forecast. The core PPI, which excludes volatile food and energy prices, rose 2.6% YoY, compared to 3.0% in May, and slightly below the 2.7% consensus estimate.

This subdued PPI reading reinforces the belief that inflationary pressures in the US are cooling, a scenario that supports the Federal Reserve’s cautious approach toward future rate hikes. With the Federal Funds Rate currently in the 4.25%-4.50% range, most Fed officials appear comfortable with holding rates steady. Moreover, concerns about potential tariff impacts on inflation have further justified this wait-and-see stance.

As a result, interest rate differentials between the BoC and the Fed are narrowing, creating a more balanced outlook for the USD/CAD pair. In the short term, this could lead to range-bound trading, with directional cues likely to emerge from upcoming data.

US Retail Sales, Jobless Claims, and Philly Fed in Focus

Markets are now turning their attention to Thursday’s key economic releases from the US, including Retail Sales for June, Initial Jobless Claims, and the Philadelphia Fed Manufacturing Index.

• Retail Sales data will be pivotal, as it provides insight into consumer spending, which makes up a significant portion of the US GDP. A strong reading could rekindle expectations for a more hawkish Fed stance, thereby lifting the US Dollar.
• Weekly initial jobless claims will offer clues about the labour market’s health. Persistent weakness could increase concerns about economic slowdown, pushing yields and the dollar lower.
• The Philly Fed Manufacturing Index will provide a timely gauge of business conditions in the Mid-Atlantic region, often used as a leading indicator of national industrial activity.

Each of these reports could significantly affect Fed expectations, US Treasury yields, and consequently, USD sentiment. A combination of soft retail sales and weak employment data could add downward pressure on the greenback, which might benefit the Loonie, especially amid a stronger domestic inflation backdrop in Canada.

Technical Overview: Resistance and Support Levels

From a technical analysis perspective, the USD/CAD pair is showing signs of consolidation just above 1.3650, with 1.3700 acting as a short-term resistance level. A clear break above this zone could open the door toward 1.3750, followed by 1.3800, particularly if US data surprises to the upside.

On the downside, initial support lies near the 20-day Exponential Moving Average (EMA) around 1.3620, with stronger demand anticipated near the 1.3580-1.3550 region, which has held as a support floor in recent sessions.

Momentum indicators like the Relative Strength Index (RSI) and MACD remain neutral, suggesting potential for range-bound movement unless catalyzed by economic surprises.

Conclusion

The USD/CAD pair’s mild gains reflect a tug-of-war between cooling US inflation data and firm Canadian price pressures, setting the stage for heightened volatility around key US economic releases. While the BoC appears increasingly reluctant to ease policy in the near term, the Fed’s dovish tilt, supported by recent PPI softness, may limit USD upside. 

Retail Sales, Initial Claims, and the Philly Fed Index will likely be decisive for the pair’s next directional move. Traders should remain cautious and monitor data closely, as shifting rate expectations could quickly reshape market sentiment and price dynamics.