USD/CAD rises to 1.3700 after good US retail sales data and weak Canadian inflation data

• The USD/CAD pair approached 1.3700 as US retail sales remained strong in September.
• The Canadian dollar weakened as weak inflation data led to expectations of firm policy from the Bank of Canada.
• Market sentiment remains cautious amid escalating tensions in the Middle East.

USD/CAD finds stellar buying interest and jumps near the 1.3700 round level resistance after the US Census Bureau reported strong consumer spending data and Statistics Canada reported a decline in price pressures in September.

US retail sales grew at a strong 0.7% pace, driven by increased demand for automobiles and restaurant spending. Economic data excluding autos rose 0.6%, almost double what was expected. The strength of retail demand could trigger consumers’ inflation expectations and make officials at the Federal Reserve (Fed) uncomfortable.

Following the encouraging US retail sales data, the Dollar Index (DXY) recovered strongly and stood near 106.50 points. While interest rate expectations at 5.25-5.50% appear unchanged for November monetary policy, as Fed officials believe that the rise in long-term bond yields is enough to restrain spending and investment.

Looking ahead, the Dollar will dance to the tune of Fed Chairman Jerome Powell’s speech scheduled for Thursday. The Fed’s Powell is expected to provide clues on likely monetary policy actions.

The market mood remains pessimistic amid intensifying tensions in the Middle East. Persistent risks of intervention by Iran and Yemen in the Israel-Palestine conflict could further worsen the situation.

Regarding the Canadian dollar, the decline in consumer inflation has raised expectations that the Bank of Canada will keep interest rates unchanged. The monthly headline and underlying Consumer Price Index (CPI) contracted 0.1%, while investors expected 0.1% growth. The general and core annual CPI softened to 3.8% and 2.8% respectively.