USD/CAD jumps to near 1.3600 on soft Canadian CPI, upbeat US Retail Sales

• USD/CAD rises to near 1.3600 as soft Canadian CPI boosts BoC rate cut prospects.
• The US Retail Sales surprisingly rose by 0.1% in August, while investors expected it to have contracted.
• Investors expect the Fed to pivot to policy normalization from Wednesday’s meeting.

The USD/CAD pair climbs above the round-level resistance of 1.3600 in Tuesday’s North American session. The Loonie asset strengthens after the release of the soft Canadian Consumer Price Index (CPI) and upbeat United States (US) Retail Sales data for August.

The Canadian CPI report showed that the headline inflation returns to the bank’s target of 2%, grew slower than the estimates of 2.1% and the former release of 2.5%. Monthly headline CPI deflated by 0.2%, while economists expected it to rise by 0.1%, slower than 0.4% in July. The Bank of Canada’s (BoC) core CPI measure decelerated further to 1.5% from 1.7% in July. Soft inflation data would prompt market expectations for the BoC reducing interest rates further. The BoC has already cut its key borrowing rates by 75 basis points (bps) to 4.25%.

Meanwhile, the US Retail Sales rose by 0.1%, which was expected to have declined by 0.2%. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers intraday losses and edges higher to near 100.80.

However, the near-term outlook of the US Dollar remains uncertain ahead of the Federal Reserve’s (Fed) monetary policy meeting on Wednesday. The Fed is widely anticipated to deliver its first-ever interest rate cut in more than four years as the central bank is concerned over slowing labor market conditions. However, traders remain divided over the likely Fed interest rate cut size.

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 bps to 4.75%-5.00% in September has increased sharply to 67% from 34% a week ago.

Investors will also focus on the Fed’s dot plot and economic projections. The Fed dot plot indicates the collective forecast Federal fund rate by all policymakers in the medium and long-term.