USD/CAD climbs above 1.3400, though it struggles to clear the 50-DMA post-US data

• USD/CAD rallied above 1.3400 after solid US economic data, putting pressure on the Federal Reserve.
• January’s Retail Sales in the United States smashed estimates, backing up Fed officials’ hawkish comments.
• Money market futures are pricing in two 25 bps rate hikes by the US Federal Reserve.

USD/CAD is still upward biased after hitting a daily high of 1.3440, though it retreated some of its gains but remains above its opening price. Data from the United States (US) sparked speculation that the Federal Reserve (Fed) would continue to tighten policy, with forecasts eyeing the Fed Funds Rate (FFR) at around 5.10%. At the time of writing, the USD/CAD exchange hand sat 1.3422 after hitting a low of 1.3331.

A positive Retail Sales report from the United States (US) bolstered the US Dollar (USD) on speculations that the Fed is ways to go to tame elevated inflation. The US Commerce Department revealed that Retail Sales in January increased significantly by 3.0% compared to the previous month, which exceeded the 1.8% growth predicted by analysts. This surge in sales followed two consecutive months of decline. The primary factor contributing to the increase in sales is the tight labor market, which has led to substantial wage growth. Additionally, higher gasoline prices might have tilted sales up.

After the data release, US Treasury bond yields, namely the US 2-year note rate, the most sensitive to changes in interest rates, peaked around 4.703%, reflecting that traders expect at least two additional rate hikes, as shown by futures data. Money market futures estimate that the FFR would hit the 5.0%-5.25% range, meaning 25 bps in March and May meetings are foreseeable.

Hence, the USD/CAD edged toward its daily high at 1.3428 before reversing course below 1.3400. However, the London Fix gave USD/CAD bulls a fresh impulse, with them eyeing a break above the 50-day Exponential Moving Average (EMA) at 1.3429.

On the Canadian side, Housing Starts fell by 13% in January “from the previous month 215,365 dwellings, well below the 240,000 units that economists had expected,” according to Reuters. Even though Canadian bond yields increased, falling oil prices weighed on the Loonie (CAD).

Of late, Industrial Production (IP) in the US remained unchanged, as reported by the US Federal Reserve (Fed), while output was weaker than foreseen, spurred by higher borrowing costs in the manufacturing sector.

USD/CAD Key technical levels