USD/CAD muted after mixed retail sales report

The Canadian dollar is drifting on Friday. In the European session, USD/CAD is trading at 1.3468, down 0.1%. With no tier-1 events on the data calendar, we can expect a quiet day for the Canadian dollar.

Retail sales decline in January after December jump

Canada’s retail sales report on Friday was a mixed bag. Consumers sharply reduced their spending in January following better-than-expected retail sales in December.

Let’s start with the good news. The end of 2023 saw strong consumer spending, with a gain of 0.9% m/m in December, revised upwards from 0.7% and beating the market estimate of 0.8%. The increase was led by higher sales for motor vehicles, fuel and food. In the fourth quarter, retail sales rose by a respectable 1%.

The news was not nearly as positive in January. The preliminary estimate of -0.4% m/m points to a sharp pullback in consumer spending. The slowdown in retail activity in January could continue as more householders renew their mortgages at higher rates, leaving less money for discretionary spending.

The Bank of Canada has repeatedly stated that rate decisions will be data-dependent, and we’ll have to wait and see what BoC policy makers make of the mixed retail sales release. Canada releases December GDP next week, followed by the BOC rate decision on February 29.

Fed officials urge caution on rate cuts

Three top Federal Reserve officials reiterated on Thursday that the Fed is planning to lower interest rates this year but not just yet. Fed Vice Chair Philip Jefferson and Governors Lisa Cook and Christopher Waller said that inflation was headed in the right direction but urged patience.

In December, the markets had priced in a rate cut in March at over 70% but that has dissipated to just 2.5% currently, according to the CME FedWatch tool. The strong US economy and constant pushback from the Fed against rate cuts in March have forced the markets to look ahead. Investors have currently priced in a 65% chance of a rate cut in June, compared to 74% just one week ago.

USD/CAD Technical

USD/CAD is testing support at 1.3477. Below, there is support at 1.3446
1.3514 and 1.3545 are the next resistance lines