• USD/CAD stays on the sidelines above 1.3700 amid uncertainty over the timeframe for Fed rate cuts.
• US customers cut heavily on discretionary spending, which indicates a decline in purchasing power.
• Canadian Retail Sales are expected to have returned in a positive trajectory.

The USD/CAD pair trades in a tight range but comfortably holds the crucial support of 1.3700 in Wednesday’s European session. The Loonie asset consolidates amid uncertainty over the Federal Reserve’s (Fed) rate-cut path due to the divergence between the Fed’s projections and market expectations for how much interest rates will be reduced this year.

Fed policymakers signalled one rate-cut this year in its last dot plot. However, financial markets strongly expect two as the latest United States (US) Consumer Price Index (CPI) report for May indicated that the progress in the disinflation process has resumed. Also, the Retail Sales for May indicated that consumers cut heavily on discretionary spending. This has built confidence among investors that inflation is progressively declining towards the 2% target.

Meanwhile, Fed officials want to see inflation declining for months before considering rate cuts.  Improving expectations for Fed rate cuts have limited the upside in the US Dollar (USD). The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, trades sideways around 105.20.

On the Loonie front, investors await the Canadian Retail Sales data for April, which will be published on Friday. Monthly Retail Sales are anticipated to have returned to a positive trajectory after contracting for three straight months. The economic data is estimated to have increased by 0.7%.

USD/CAD continues to consolidate in the 1.3600-1.3800 range from almost seven weeks. The Loonie asset holds the 200-day Exponential Moving Average (EMA), which trades around 1.3690, suggesting that the overall trend is bullish.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating indecisiveness among market participants.

A fresh buying opportunity would emerge if the asset breaks above the April 17 high at 1.3838. This would drive the asset towards 1 November 2023 high at 1.3900, followed by the psychological resistance of 1.4000.

In an alternate scenario, a breakdown below June 7 low at 1.3663 will expose the asset to May 3 low around 1.3600 and April 9 low around 1.3547.

USD/CAD four-hour chart