The USD/CAD pair remained steady near the 1.3700 mark following the release of the US Consumer Price Index (CPI) report for July. The data showed that yearly price pressures slowed down as expected. The Bank of Canada (BoC) is anticipated to cut interest rates for the third consecutive time, further influencing the movement of the USD/CAD pair.
The CPI report highlighted that both annual headline and core inflation rates, which exclude food and energy prices, decreased by one-tenth to 2.9% and 3.2% respectively. Monthly inflation rates for both categories increased by 0.2%. This expected decline in US inflation provided some support to the US Dollar, which was heading towards revisiting a seven-month low. The US Dollar Index (DXY) experienced a slight rebound after hitting an intraday low at 102.36.
While the inflation report indicated that price pressures are on track to reach the desired 2% rate, expectations for a significant interest rate cut by the Federal Reserve have diminished. According to the CME FedWatch tool, the likelihood of a 50-basis point rate reduction decreased to 41.5% from 54.5% after the release of the CPI report. The Canadian Dollar faced some selling pressure due to a gradual correction in oil prices following a continuous rally, as investors monitored developments in conflicts between Iran and Israel in the Middle East.
Looking ahead, market speculation regarding potential rate cuts by the Bank of Canada will continue to influence the Loonie. With limited top-tier economic data expected this week, investors are closely monitoring the possibility of further policy easing by the BoC in September to prevent any worsening of the labor market situation. Canada’s status as a major exporter of oil to the US means that changes in oil prices can have a significant impact on the value of the Canadian Dollar.
One key economic indicator to watch in determining inflationary or deflationary trends is the Consumer Price Index ex Food & Energy (YoY). This indicator measures the prices of a basket of representative goods and services on a monthly basis. The YoY reading compares these prices to the same month in the previous year. By excluding volatile food and energy prices, the CPI ex Food & Energy provides a more accurate reflection of underlying price pressures. A high reading is typically seen as bullish for the US Dollar, while a low reading is considered bearish.
