Canadian inflation set to cool further in July, adding to further BoC rate cut bets

• Canadian CPI continues to lose ground in July.
• BoC could extend its easing cycle in the latter part of the year.
• The Canadian dollar looks firm against its US counterpart so far in August.

Canada is set to release its latest inflation numbers on Tuesday, with Statistics Canada releasing consumer price index (CPI) data for July. Forecasts suggest a continuation of disinflationary trends in headline CPI, while another increase in the core, as occurred in June, could add some volatility to the release.

In addition to the CPI data, the Bank of Canada (BoC) will also release the headline consumer price index, which excludes volatile components such as food and energy. In June, the BoC’s core CPI was down 0.1% from May’s reading and a 1.9% gain over the past twelve months, while headline CPI rose 2.7% in last year and contracted by 0.1% compared to the previous month.

These numbers are being closely watched as they could weigh on the Canadian dollar (CAD) in the near term and shape expectations for the Bank of Canada’s monetary policy, especially after the central bank cut its policy rate by another 25 basis points (bps). to 4.50% in July.

In the FX world, the Canadian dollar gathered strong traction following year-to-date lows near 1.3950 against the greenback on August 5. Thus far, the USD/CAD downside remains well guarded by the key 200-day SMA near 1.3600. .

What can we expect from Canada’s inflation rate?

Analysts expect price pressures in Canada to maintain their downward trend in July, although they are likely to remain above the central bank’s target. Consumer prices are expected to follow the recent trend seen in the US, where lower-than-expected CPI data fueled speculation of a 50bps interest rate cut by the Federal Reserve (Fed) in September. Despite these expectations subsequently falling flat, along with strong US macro data results, the Fed is expected to cut interest rates by 25 bps next month.

If future data meets these expectations, investors could speculate that the Bank of Canada (BoC) could further ease monetary policy with another quarter-point interest rate cut, potentially lowering the policy rate to 4 .25% at its September 4 meeting.

According to the minutes of its July event, BoC governors expressed concern about weaker consumer spending in 2025 and 2026 compared to expectations. Lower borrowing costs could boost spending, but households would still face debt service burdens, hampering any recovery. Economic growth lags behind population growth, causing oversupply and labor market decline. This could weaken the labor market and dampen consumption, affecting growth and inflation.

Turning to inflation and following last month’s interest rate cut, BoC Governor Tiff Macklem argued that the economy was facing excess supply, with a weakening labor market contributing to downward pressure on inflation. He noted that their assessment indicates that there is already sufficient excess supply in the economy and stressed that rather than increasing excess supply, the focus should be on stimulating growth and creating jobs to absorb this surplus and achieve a sustainable return to the 2% inflation target. “

Analysts at TD Securities commented that: “Markets will look to July CPI for a final update on underlying price pressures ahead of the BoC’s decision in September, with TD projecting a 0.2 percentage point drop to 2.5% of /a, although a stronger boost in core inflation should give the report a mixed tone.”

When is Canadian CPI data due and how could it affect USD/CAD?

On Tuesday at 12:30 GMT, Canada will release the Consumer Price Index (CPI) for July. The response of the Canadian dollar will largely depend on any change in expectations regarding the Bank of Canada’s (BoC) monetary policy. However, unless there are significant surprises in the data, the BoC is expected to maintain its current easing approach, somewhat mirroring the stance of other central banks such as the Fed.

USD/CAD started the month trading in a strong trend and climbing to yearly highs around 1.3950. However, the Canadian currency managed to regain firm momentum and was down almost three cents at the time of writing, pari passu with a strong corrective decline in the US dollar (USD).

FXStreet Senior Analyst Pablo Piovano suggests that USD/CAD looks well supported by the critical 200-day SMA around 1.3600. A breach of this level could trigger further weakness to the next note support from the March low of 1.3419 (March 8) before the weekly low of 1.3358 on January 31.

Furthermore, Pablo adds, immediate resistance is found at the 2024 high of 1.3946 (August 5), ahead of the key 1.4000 landmark (June 11).

Pablo also noted that significant increases in CAD volatility would likely depend on unexpected inflation data. If the CPI comes in below expectations, it could strengthen the case for another BoC interest rate cut at the upcoming meeting, sending USD/CAD higher. On the other hand, if inflation beats expectations, the Canadian dollar could see only modest support.