Canadian dollar eyes inflation release

The Canadian dollar is showing limited movement on Tuesday. USD/CAD is trading at 1.3675 in the European session, up 0.12% on the day at the time of writing. We could see some volatility in the North American session, when Canada releases the May CPI report. In the US, today’s highlights are the CB Consumer Confidence index and the Richmond Manufacturing index.

Canada’s inflation rate expected to fall

Canada’s annual inflation rate is projected to dip to 2.6% in May, compared to 2.7% in April, which was the lowest rate since March 2021. Monthly, inflation is expected to ease to 0.3%, down from 0.5% in April.

With inflation on a downward path, the markets are keeping a close eye on the Bank of Canada, which lowered rates earlier in June for the first time since its rate-hike cycle began in March 2022. The cut showed that the central bank was willing to make a major shift in policy and deliver a rate cut even with inflation above the BoC’s 2% target.

The BoC won’t cut for a second time, however, until it is convinced that inflation is on the decline, which makes today’s CPI release a key factor in the BoC’s rate plans. A decline in today’s inflation report could set the stage for a back-to-back rate cut at the July 18th meeting.

The central bank is taking a cautious approach to further rate cuts and has stressed that each rate decision will be taken one at a time, based on the data. Governor Macklem said earlier this week that he doesn’t want to lower rates too quickly and jeopardize the success that the BoC has made in bringing inflation down.

USD/CAD Technical

• USD/CAD is testing resistance at 1.3675. Above, there is resistance at 1.3695
• 1.3637 and 1.3614 are the next support levels

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