USD/CAD reaches near 1.3600 on weak Canadian CPI, upbeat US retail sales

• USD/CAD rises near 1.3600 as soft Canadian CPI boosts BoC rate cut prospects.
• U.S. retail sales surprisingly rose 0.1 percent in August, while investors expected it to have contracted.
• Investors expect the Fed to move toward policy normalization at Wednesday’s meeting.

The USD/CAD pair is climbing above the resistance at the round level of 1.3600 in the North American session on Tuesday. The Loonie is strengthening after the release of the Canadian Consumer Price Index (CPI) and upbeat United States (US) retail sales data for August.

The Canadian CPI report showed headline inflation returning to the bank’s target of 2 per cent, rising more slowly than estimates of 2.1 per cent and the previous release of 2.5 per cent. Total monthly CPI deflated 0.2 percent, while economists had expected a 0.1 percent rise, slower than July’s 0.4 percent. The Bank of Canada’s (BoC) core CPI measure fell further to 1.5% from 1.7% in July. Weak inflation data would boost market expectations for the BoC to cut interest rates further. The BdC has already cut its key lending rates by 75 basis points (bps) to 4.25%.

Meanwhile, US retail sales rose 0.1%, which was expected to have fallen 0.2%. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is recovering intraday losses and advancing to near 100.80.

However, the short-term outlook for the US dollar remains uncertain ahead of the Federal Reserve’s (Fed) monetary policy meeting on Wednesday. The Fed is expected to make its first interest rate cut in more than four years as the central bank worries about slowing labor market conditions. However, traders remain divided on the likely size of the Fed’s interest rate cut.

According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 bps to 4.75%-5.00% in September rose sharply to 67% from 34% a week ago.

Investors will also focus on the Fed’s dot chart and economic projections. The Fed dot chart shows the collective estimate of the federal funds rate by all policymakers over the medium to long term.