USD/CAD holds positive ground near 1.3600 on firmer US Dollar

• USD/CAD strengthens around 1.3600 in Wednesday’s early Asian session. 
• Traders are pricing in nearly 60% odds of a 50 bps Fed rate cut. 
• Canadian CPI rose 2.0% YoY in August vs. 2.5% prior, softer than expected. 

The USD/CAD pair trades in positive territory for a fourth consecutive day near 1.3600 during the early Asian session on Wednesday. The US Dollar (USD) gains ground after the better-than-expected Retail Sales data. Traders brace for the Federal Reserve (Fed) interest rate decision on Wednesday, which is widely anticipated to lower its interest rate for the first time in more than four years.

Data released by the Commerce Department on Tuesday showed that US Retail Sales unexpectedly rose 0.1% MoM in August versus 1.1% prior. This figure was above the market consensus of -0.2% and suggested a sign of resilience among US households. Meanwhile, Industrial Production came in better than the estimation, climbing 0.8% MoM in August, compared to a decline of 0.6% in the previous reading. 

However, the August Retail Sales and Industrial Production reports did not convince the Fed officials much about the size of the rate cut at its September meeting. According to the CME Fedwatch Tool, Fed funds futures have priced in a nearly 63% chance of a 50 basis points (bps) rate cut, up from 30% a week ago, while the odds of a 25 bps cut were at 37%. The jumbo Fed rate cut could further undermine the USD against its rivals. 

The Canadian Consumer Price Index (CPI) hit the 2% target in August as inflation continued a downward trajectory. The country’s CPI rose 2.0% YoY in August, compared to 2.5% in July, softer than the 2.1% expected, Statistics Canada showed Tuesday. On a monthly basis, the CPI figure was -0.2% in August versus 0.4% prior. 

The rising speculation that the Bank of Canada (BoC) will cut additional interest rates weighs on the Canadian Dollar (CAD) and acts as a tailwind for USD/CAD. Money markets are fully pricing in 25 bps rate cuts at each of the last two monetary policy meetings this year. Meanwhile, expectations of a 50 bps cut in the October meeting rose to 47.5% from 46% before the CPI data.