• Following a 2.7% increase in April, the Canadian Consumer Price Index is expected to grow by 2.6% YoY in May.
• The timing of the next interest rate reduction by the Bank of Canada will probably be influenced by the country’s CPI inflation data.
• The CPI inflation statistics will be released by Statistics Canada on Tuesday at 12:30 GMT.

The premier Consumer Price Index (CPI) data for May will be made available by Statistics Canada on Tuesday at 12:30 GMT.

The CPI inflation report will determine when the Bank of Canada (BoC) will cut interest rates next, which will have a big impact on market pricing and the value of the Canadian dollar.

How will Canada’s inflation rate develop?

May’s predicted annual rate of increase for the Canadian CPI is 2.6%, slightly less than the 2.7% increase in April. After growing by 0.5% in April, the CPI inflation is expected to have eased to 0.3% in the same period. There was no increase in the core CPI for April.

The Bank of Canada will release its carefully watched core Consumer Price Index data, which omits volatile components like food and energy prices, concurrently with the release of the CPI data. The monthly BoC core CPI is expected to increase by 0.2% in May, while the annual BoC core CPI inflation is expected to remain stable at 1.6%.

Even though it is getting closer to the central bank’s 2.0% objective, Canada’s inflation will probably remain below 3.0% for the fifth consecutive month.

Analysts at TD Securities (TDS) predicted that May’s headline CPI would climb by 0.3% due to a significant increase in shelter costs, however, inflation would likely decline to 2.6% year over year.

The TDS analysts stated, “Core inflation measures should hold stable at 2.9%/2.6% for CPI-trim/median, translating to a modest acceleration on a 3M (SAAR) basis, but we see a high bar for this print to derail a July cut.” They did not anticipate the BoC being unduly concerned by this.

At the policy meeting on July 24, the markets are mostly pricing in another rate drop from the BoC. But before the following policy statement, there is one more inflation report that needs to be released.

“It would probably take a bad reading, either this month or next, to stop the Bank of Canada from cutting,” stated James Orlando, Director of Economics at TDS.

Last week, the central bank’s Summary of Deliberations made public that Governor Tiff Macklem and his associates considered delaying interest rate cuts until July, but eventually opted to do so at the June 5 meeting.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2.0% target continues to increase,” Macklem stated after the policy announcement. “It is reasonable to expect further cuts to our policy interest rate.”

The Bank of Canada (BoC) became the first country within the G7 to embrace the dovish policy tilt, following the European Central Bank (ECB) and Sweden’s Riksbank in lowering rates. For the first time in four years, the central bank reduced the key policy rate from 5.0% in June to 4.75%.

How can the USD/CAD be impacted by the Canada CPI data?

In anticipation of Tuesday’s CPI showdown, the Canadian dollar (CAD) has slowed its rise from two-month lows of 1.3792 against the US dollar (USD). At the beginning of the new week, risk aversion and strong S&P Global preliminary PMI data for June from the US continued to strengthen the US Dollar, supporting the USD/CAD pair.

If the headline and core CPI numbers surprise the upside and defy predictions of consecutive interest rate decreases by the BoC, the Canadian dollar may resume its upward trajectory. In that scenario, the USD/CAD exchange rate may continue its corrective decline toward the 1.3600 mark. On the other hand, weak CPI statistics would increase the Bank of Canada’s confidence that inflation is steadily approaching its target, which would impact market expectations for a rate decrease the following month. Under this situation, fresh dovish wagers may put significant pressure on the CAD, causing USD/CAD to rally towards 1.3800. 

Senior Analyst at FXStreet Dhwani Mehta provides important technical levels for trading USD/CAD in response to Canada’s inflation report: The pivotal confluence zone, or 1.3690, where the 50-day SMA and the horizontal 21-day Simple Moving Average (SMA) intersect, is where USD/CAD is fighting. The purchasers’ caution is reflected in the 14-day Relative Strength Index (RSI), slightly below the 50 mark.

Acceptance over the 50-day and 21-day SMA confluence at 1.3690 may push the USD/CAD back towards its high of 1.3765 from the previous week. Buyers will be watching for the 1.3800 round mark, which is near the two-month high of 1.3792. On the negative side, a daily close below the 100-day SMA around 1.3619 will once again allow for a test of the static support area at 1.3665. According to Dhwani, the 200-day SMA at 1.3586 is the next significant cushion.