USD/CAD surges to 1.3700 after upbeat US Retail Sales, soft Canada inflation data

• USD/CAD jumped to near 1.3700 as US Retail Sales remained robust in September.
• The Canadian Dollar weakened as soft inflation data prompted hopes of a steady BoC policy.
• The market mood remains cautious amid deepening Middle East tensions.

The USD/CAD pair finds stellar buying interest and jumps to near the round-level resistance of 1.3700 after the United States Census Bureau reported robust consumer spending data and Statistics Canada reported a decline in price pressures in September.

US Retail Sales expanded at a robust pace of 0.7%, boosted by higher automobile demand and spending on dining out. The economic data excluding automobiles rose by 0.6%, almost at a double pace from expectations. Robust retail demand could spurt consumer inflation expectations and create discomfort for Federal Reserve (Fed) policymakers.

After upbeat US Retail Sales data, the US Dollar Index (DXY) recovered strongly to near 106.50. While expectations for interest rates at 5.25-5.50% seem unchanged for November monetary policy as Fed policymakers see higher long-term bond yields sufficient to restrict spending and investment.

Going forward, the US Dollar will dance to the tune of the speech from Fed Chair Jerome Powell, which is scheduled for Thursday. Fed Powell is expected to provide cues about the likely monetary policy action.

The market mood remains downbeat amid deepening Middle East tensions. Persistent risks of intervention by Iran and Yemen in the Israel-Palestine conflict could worsen the situation further.

On the Canadian Dollar front, a decline in consumer inflation has prompted expectations that the Bank of Canada (BoC) will keep interest rates unchanged ahead. The monthly headline and core Consumer Price Index (CPI) contracted by 0.1% while investors forecasted a growth of 0.1%. The annual headline and core CPI softened to 3.8% and 2.8% respectively.