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26 June 2024 | FXGT.com

USD/CAD Drops as Canadian Inflation Surprises and Rate Cut Expectations Shift

  • USD/CAD Falls Sharply: The USD/CAD pair saw a notable decline during Tuesday’s New York session, as the Canadian Dollar gained strength following the release of unexpectedly high Canadian inflation data for May.
  • Canadian CPI and Oil Prices Support Loonie: The higher-than-expected Canadian Consumer Price Index (CPI) reading on Tuesday, alongside rising oil prices, has boosted the Canadian Dollar. This combination has provided solid support for the Loonie against the US Dollar, driving the pair’s decline.
  • Canadian Inflation Report: Canada reported a surprising increase in the Consumer Price Index (CPI) for May. Annual headline inflation rose to 2.9%, up from 2.7% and surpassing the anticipated 2.6%. Monthly headline CPI increased by 0.6%, outpacing April’s 0.5% rise. The core CPI, which excludes eight volatile items, also climbed by 0.6% month-over-month, up from 0.2% in April, with an annual rise to 1.8% from 1.6%.
  • Impact on Bank of Canada: The unexpected inflation increase is likely to lead the Bank of Canada to take a more cautious stance on further rate cuts. The chances of a rate cut at the July 24th meeting have now fallen below 50%. These recent inflation figures suggest that any immediate cuts may be postponed in the short term.
  • Fed Rate-Cut Uncertainty Caps USD: Ongoing uncertainty about the Federal Reserve’s timing for rate cuts is keeping the USD from gaining traction. Despite some hawkish comments from Federal Open Market Committee (FOMC) members indicating no urgency to lower borrowing costs, the moderating inflationary pressures maintain hopes for a potential rate cut in September, thus limiting USD gains.
  • Upcoming US Data: Traders are eagerly awaiting key US macroeconomic data later in the week, including the final Q1 GDP print on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday. The PCE, being the Fed’s preferred inflation gauge, will play a crucial role in shaping market expectations regarding future Fed policy decisions, impacting USD demand and the direction of the USD/CAD pair.
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