**USD/CAD Rises Toward 1.3650 as Canadian Retail Sales Contract and USD Strengthens**
*Based on an article originally published by FXStreet staff on July 24, 2024*
The USD/CAD currency pair gained strength on Wednesday, nearing the 1.3650 level, as a combination of stronger U.S. economic outlook and weaker-than-expected Canadian retail data pushed sentiment in favor of the U.S. dollar. The exchange rate moved higher following the release of Canadian retail sales data that indicated a contraction in consumer spending, while key U.S. economic indicators and hawkish Federal Reserve commentary provided additional tailwinds for the greenback.
### Canadian Retail Sales Dip in May
Statistics Canada reported on Wednesday that Canadian retail sales declined by 0.2 percent in May 2024, falling short of market expectations which had projected a modest growth of around 0.5 percent. The underperformance added pressure to the Canadian dollar across the board.
– **May Retail Sales**: -0.2% month-over-month
– **Retail Sales Excluding Autos**: -0.1% vs an expected 0.3% rise
The drop in retail spending is the second decline in three months, reflecting a shift in consumer behavior due to persistent high interest rates, elevated household debt levels, and a cooling labor market. Consumers appear to be tightening spending amid economic uncertainty, a trend that has contributed to broader concerns about the pace of Canada’s economic growth in the second half of the year.
### Underlying Issues in Canada’s Economy
The Canadian economy has struggled to regain momentum following the impact of high interest rates imposed by the Bank of Canada over the past year and a half. Although inflation has eased substantially from mid-2022 highs, the central bank continues to strike a cautious tone.
Key economic challenges include:
– **High Household Debt**: Canadian households carry one of the highest levels of debt relative to disposable income among G7 countries.
– **Housing Market Slowdown**: The Canadian housing market has shown signs of cooling, with home sales declining in major provinces, especially British Columbia and Ontario.
– **Interest Rate Environment**: The Bank of Canada cut interest rates by 25 basis points in June to 4.75%, its first rate cut since 2020. However, policymakers have not committed to a fast-paced easing cycle, citing inflationary uncertainties.
Retail sales are generally seen as a barometer for domestic demand. A decline in this metric suggests that both consumer confidence and economic resilience are weakening, possibly increasing the likelihood that the Bank of Canada may pursue further interest rate cuts over the coming months.
### U.S. Dollar Supported by Solid Economic Signals
In contrast to the Canadian situation, the U.S. dollar received a boost from resilient economic data, which continues to support the narrative of a soft landing for the world’s largest economy. On Wednesday, market participants reacted positively to recent reports showing robust labor market conditions, steady manufacturing output, and a rebound in service sector activity.
A few key highlights:
– **U.S. PMI Composite Index (July flash)**: Rose to 53.5, beating expectations of 52.0
– **Durable Goods Orders**: Increased 0.6% in June vs. forecast of 0.3%
– **Initial Jobless Claims**: Remain near multi-month lows, indicating labor market resilience
These data points bolster expectations that the Federal Reserve may maintain higher interest rates for longer, especially if inflation proves stubborn. While Fed Chair Jerome Powell and other key officials have signaled a cautious outlook, recent Fedspeak has emphasized the risks of cutting too soon.
### Hawkish Federal Reserve Keeps USD in Demand
Various Federal Reserve speakers this week, including Cleveland Fed President Loretta Mester and Minneapolis Fed President Neel Kashkari, emphasized the importance of achieving price stability. Both Fed officials echoed the sentiment that interest rates should remain high until inflation is definitively under control and trending
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