Canadian annual CPI decelerated to 2.8%, with core measures easing, boosting odds of a Bank of Canada rate cut and pressuring the loonie.
Softer Canadian inflation data lowers the likelihood of further rate hikes by the Bank of Canada and increases the probability of near-term rate cuts. This interest rate differential dynamic weakens the demand for the Canadian dollar, pushing USD/CAD higher.
The lower inflation print diminished expectations for BoC tightening and increased the odds of rate cuts, making the Canadian dollar less attractive relative to the US dollar.
The pair faces resistance near 1.3750, and a sustained break above could target the 1.3850 area.
Canada's annual inflation rate decelerated to 2.8% in July, with core inflation measures also easing, reinforcing expectations that the Bank of Canada may soon pivot to rate cuts. The softer price data lifted bond prices and weighed on the Canadian dollar.
Headline CPI dropped to 2.8% year-over-year, down from previous readings, while core measures like the median and trim also eased, pointing to broad disinflationary pressure.
The softer inflation reinforces market expectations that the BoC can begin cutting interest rates, possibly as soon as the next meeting, as price pressures align with their target.
The Canadian dollar weakened against the US dollar, bond yields fell across the curve, and equities in Toronto rose as lower rate prospects improved the outlook for rate-sensitive sectors.