Canadian Dollar extends gains over US Dollar, BoC stance limits further upside

USD/CAD trades around 1.4010 at the time of writing on Thursday, down 0.21% on the day as the Canadian Dollar (CAD) extends its gains against the US Dollar (USD). The pair remains under pressure despite US economic data broadly meeting expectations, with the Greenback failing to sustain a rebound after recent inflation data reinforced expectations that the Federal Reserve (Fed) will keep moving toward monetary easing.

Data released on Thursday showed that US Retail Sales rose 0.2% MoM in June, matching market expectations, while May's reading was revised higher to 1%. The Retail Sales Control Group also increased by 0.5%, in line with forecasts, while Initial Jobless Claims declined to 208K from the revised 216K previously, pointing to continued resilience in the US labor market.

The US Dollar remains caught between supportive economic data and expectations that the Fed will keep interest rates on hold. Earlier this week, softer-than-expected US Producer Price Index (PPI) data reinforced the view that inflation pressures continue to moderate, limiting the Greenback's upside despite Thursday's solid macroeconomic releases.

Geopolitical developments continue to support demand for safe-haven assets. The United States (US) carried out another round of strikes against Iranian targets, while Tehran said it retaliated by targeting US assets in Kuwait, Bahrain and Jordan. According to Reuters, Iran also instructed Yemen's Houthis to close the Bab el-Mandeb Strait if the US attacks its power network. However, Oil prices continue to ease despite the heightened risks to regional energy supplies, limiting additional support for the commodity-linked Canadian Dollar.

The Bank of Canada (BoC) left its benchmark interest rate unchanged at 2.25% on Wednesday, as widely expected, marking a sixth consecutive meeting without a policy change. Governor Tiff Macklem said that Canada's economic growth appears to be resuming after stalling over the past year, although US trade policy remains a headwind.

Commerzbank analysts argue that any further decline in USD/CAD is likely to depend primarily on continued weakness in the US Dollar rather than stronger Canadian fundamentals. BBH also believes the BoC's updated projections leave little room for additional tightening. At the same time, TD Securities notes that the central bank's balanced guidance offers limited immediate support for the Canadian Dollar. However, improving domestic economic data could eventually allow USD/CAD to extend its move below the 1.40 level.