USD/CAD weakens below 1.3700 amid rising Fed rate cut bets

• USD/CAD trades with mild losses around 1.3670 in Wednesday’s early Asian session. 
• US Retail Sales held steady in June, followed a 0.3% increase in May, in line with expectations.
• The cooler-than-expected Canadian CPI triggered expectations of another rate cut by the BoC next week.

The USD/CAD pair trades in a negative territory near 1.3670 during the early Asian session on Wednesday. The rising speculation of a rate cut by the Federal Reserve (Fed) in September continues to undermine the USD Index (DXY). Investors will monitor US Building Permits, Housing Starts, Industrial Production, and the Fed Beige Book. Also, Fed’s Barkin and Waller are set to speak.

US Retail Sales were unchanged in June and did not change expectations that the Fed would start cutting interest rates in September amid the signs of cooling inflation. Retail Sales in the US held steady at $704.3 billion in June, followed the 0.3% increase (revised from 0.1%) in May, and came in line with the market expectations. Retail sales rose 2.3% on a year-on-year basis in June.

Fed Governor Adriana Kugler said on Tuesday that inflation is on course to reach the Fed's 2% target, with goods, services and now housing contributing to easing price pressures. However, the US central bank still needs more evidence of the rate cut puzzle before considering rate cuts. Fed Chair Jerome Powell stated that recent data has boosted confidence that inflation will ease to the 2% target from its current level about half a percentage point above that mark. Financial markets expect a rate cut in September followed by additional cuts in November and December. This, in turn, weighs on the Greenback against the Loonie. 

On the other hand, the softer Canadian Consumer Price Index has spurred expectations that the Bank of Canada (BoC) would cut interest rates further next week. "The inflation data for June gave the Bank of Canada what it needed in order to cut interest rates at next week's meeting," said Katherine Judge, senior economist at CIBC Capital Markets. Meanwhile, the decline in crude oil prices might exert some selling pressure on the Canadian Dollar (CAD) and cap the downside of the pair. It’s worth noting that Canada is the biggest Oil exporter to the United States (US).