USD/CAD extends consolidation ahead of US Consumer Sentiment data

• USD/CAD trades in a narrow range near 1.3960 on Friday, showing muted price action.
• Canada's manufacturing sales fell 1.4% in March, less than what economists had expected.
• The US Dollar Index holds above 100.00 after Thursday's mixed US economic data.

USD/CAD is trading flat around 1.3960 at the time of writing on Friday, showing little to no directional bias as the pair remains confined within a narrow weekly range. The Canadian Dollar (CAD) has lost momentum after reaching a five-month high of 1.3750 on May 6, with the pair now hovering above its 21-day Exponential Moving Average (EMA), while the 50-day EMA near 1.4024 continues to cap upside moves.

On the macro front, Canadian Manufacturing Sales declined by 1.4% MoM in March, a softer drop compared to the preliminary estimate of a 1.9% fall. The decline was largely driven by weaker activity in the primary metals and petroleum-and-coal-products sectors. While the data reflects underlying economic softness, the smaller-than-expected contraction offered limited support to the Canadian Dollar.

Market sentiment around the Loonie has weakened in recent days as investors increasingly price in potential interest-rate cuts by the Bank of Canada (BoC). The move follows a disappointing April labor market report released on May 9, which showed the unemployment rate jumping to 6.9%.

This has led the investors to price in a greater-than 50 % probability of a BoC rate cut in June, further weighing on the Loonie, according to a Reuters report.

That creep up in interest rate expectations for the Bank of Canada is weighing on the Loonie," said Amo Sahota, director at Klarity FX in San Francisco, adding that diverging prospects between the BoC and the Federal Reserve have widened the gap between Canadian and U.S. short-term rates.

The CAD's direction in the mid-term remains closely tied to any trade-related developments between Canada and its southern neighbour, the US. The Bank of Canada's (BoC) annual Financial Stability Report, released on May 8, highlighted that ongoing trade tensions are the biggest threat to Canada's economy and financial system. The central bank cautioned that rising global protectionism could worsen existing risks in the domestic financial sector.

On the other hand, despite the mixed data released on Thursday, the US Dollar Index (DXY) - which tracks the Greenback against a basket of six major currencies - is broadly steady and holds above the 100.00 mark, supported by cautious risk sentiment and steady Treasury yields. 

Traders are now looking ahead to a fresh set of US economic indicators scheduled for release later on Friday, including the import/export Price Indexes, Housing Starts, Building Permits, and the University of Michigan's Consumer Sentiment survey. The latter will be particularly important to gauge the US consumer mood after four consecutive months of declines.

Looking at next week, attention will shift to Canada's monthly Gross Domestic Product (GDP) report due next Tuesday, which could provide further cues on the domestic growth outlook and shape expectations for future Bank of Canada policy moves.