USD/CAD corrects sharply below 1.3200 despite solid recovery in US Dollar, oil jumps

• USD/CAD has dropped below 1.3200 as oil prices have jumped significantly.
• The USD Index has come out of the woods as the Fed is widely expected to raise interest rates further.
• Momentum in consumer spending in Canada slowed down significantly in May.

The USD/CAD pair has slipped to near the round-level support of 1.3200 in the European session. The Loonie asset struggles to find support despite strength in the US Dollar as investors are expecting a confirm interest rate hike from the Federal Reserve (Fed), which will b announced on July 26.

S&P500 futures have added significant gains in London after a choppy Friday, portraying ease in caution among market participants. It seems that investors are shrugging-off risk ahead of the interest rate decision by the Fed.

The US Dollar Index has faced some pressure after printing a fresh day’s high at 101.40, more upside seems intact as the Federal Reserve (Fed) is expected to restart its rate-hike cycle, which was temporarily paused in June. An interest rate hike of 25 basis points (bps) will push interest rates to 5.25-5.50%. As per the CME Fedwatch tool, this could be a peak of the 17-month-long aggressive interest rate cycle.

Meanwhile, the Canadian Dollar has shown resilience as oil prices are approaching the crucial resistance of $78.00. As global central banks are approaching to interest rate peak, investors hope that the economic outlook would attract upgrades from institutional investors as oil demand will return to normal. It is worth noting that Canada is the leading exporter of oil to the United States and higher oil prices would support the Canadian Dollar.

On the economic front, momentum in consumer spending in Canada slowed down significantly in May. Monthly Retail Sales expanded at a slower pace of 0.2% than expectations of 0.55 and the former release of 1.0%. Retail demand excluding automobiles remained stagnant while investors were expecting an expansion by 0.3%. This would allow the Bank of Canada (BoC) to keep interest rates steady at 5% ahead.