The USD/CAD has experienced depreciation, influenced by a series of weaker economic indicators from the United States, prompting traders to reassess their expectations regarding potential Federal Reserve rate increases. US Retail Sales decreased by 0.6% in July, which has led to a reduction in market expectations regarding forthcoming Federal Reserve rate hikes. Heightened tensions in the Middle East, coupled with the introduction of new US sanctions on Iran, resulted in an increase in crude oil prices over the weekend. USD/CAD continues to decline for the third straight day, currently trading near 1.3870 during the Asian session on Monday. The pair depreciates as the US Dollar declines amid weaker-than-expected US economic data and shifting central bank expectations. The US Census Bureau reported on Friday that retail sales declined by 0.6% month-over-month in July, a reversal from the 0.2% increase observed in June, and falling short of the market consensus which anticipated a 0.1% growth.
On an annual basis, Retail Sales increased by 5.0% in July, a decline from the 6.8% growth observed in the preceding month. Traders have scaled back their expectations for Federal Reserve rate hikes in light of a series of weaker US economic indicators, encompassing CPI, PPI, and Retail Sales. Markets are currently assigning a probability of 33.1% to a rate hike next month, a decrease from the 44% observed last week, as indicated by the CME FedWatch tool. The USD/CAD pair encounters difficulties as the commodity-sensitive Canadian Dollar gains traction from elevated oil prices. West Texas Intermediate oil price continues to gain for the second consecutive day, trading around $81.80 per barrel at the time of writing.
Crude oil prices are on the rise, driven by heightened tensions in the Middle East that have left markets cautious about potential supply disruptions. Over the weekend, Israel executed new military strikes in Lebanon, resulting in the deaths of 11 individuals, among them a high-ranking commander of Hezbollah. Commerzbank warns that the disruption to output in the Gulf is materially tightening the global balance, with its analysts estimating that “due to significant production losses in the Gulf region, total supply is expected to fall by 4.3 million barrels per day, meaning the oil market will be significantly undersupplied this year.”
Citing the latest projections from the IEA, the bank notes that “the supply deficit in the third quarter stands at 1.8 million barrels per day. This is 1 million barrels per day more than previously expected,” underscoring how quickly the perceived shortfall has widened. Meanwhile, US President Donald Trump is preparing new economic sanctions aimed at compelling Iran to capitulate, as pressure intensifies on his administration to conclude the military campaign. The situation remains precarious as the interim ceasefire agreement between the US and Iran is poised to formally expire later today, while discussions aimed at resolving the conflict and reopening the Strait of Hormuz remain stalled.
