Canadian dollar gets boost from sizzling retail sales

• Canada’s retail sales higher than expected
• Fed’s Powell stays hawkish, signals two rate hikes

The Canadian dollar is almost unchanged in the North American session, trading at 1.3165.

Canada’s retail sales surprise to the upside

Canadian retail sales rebounded impressively in April, after declining in March. Headline retail sales jumped 1.1% m/m in April, after a -1.5% reading in March and crushing the consensus of 0.2%. Core retail sales was even stronger with a 1.3% gain, up from -0.4% and above the consensus of 0.4%. Canadian consumers may be grappling with high inflation and rising interest rates, but they were back in spending mode after a sour April.

Retailers are smiling at the increase in consumer spending but central bank policy makers are less pleased. The BoC has aggressively tightened in order to cool domestic demand and lower inflation. Consumer spending has been resilient despite high interest rates and the retail sales report will add pressure on the BoC to raise rates at the July meeting. A tight labour market has further complicated the battle against inflation and the BoC may have to adopt a “higher and longer” rate-hike cycle than it had anticipated.

Powell stays hawkish on inflation

Fed Chair Powell didn’t have any dramatic messages in his testimony before a House Committee on Wednesday. Powell reiterated that inflation pressures remained high and getting inflation back to 2% “has a long way to go”. Powell was quite transparent about future rate policy, saying “it was a pretty good guess” that the Fed would raise rates twice more this year. The markets have priced in a July hike at 77%, according to the CME FedWatch Tool. Earlier in the year, the markets priced in rate cuts of up to 100 basis points in the second half of 2023, but a hawkish Fed and a resilient US economy have snuffed out expectations of rate cuts this year.

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USD/CAD Technical

• There is resistance at 1.3253 and 1.3329
• 1.3123 and 1.3047 are providing support

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