Canada CPI expected to show rising inflation in July

• Canadian inflation is expected to rise by 2.9% YoY in July.
• The core CPI is still seen well above the BoC’s 2% target.
• The Canadian Dollar has been steadily appreciating vs the US Dollar.

Canada’s July Consumer Price Index (CPI) figures will be the focus of attention when published on Monday. Indeed, Statistics Canada data will provide markets with an update on price pressures following the Bank of Canada’s (BoC) July 15 gathering, when officials kept the interest rate steady at 2.25%, broadly in line with the consensus among analysts.

This time, economists expect the headline CPI to rise by 2.9% in the year to July, still above the central bank’s goal and up from June’s 2.8% annual increase. On a monthly basis, prices are expected to rise by 0.7%. The bank will also closely monitor its core measure (which strips food and energy costs), expected to rise by 2.2%, up from the 2.1% YoY gain recorded in the previous month.

In the current context of heightened geopolitical volatility, crude Oil dynamics are likely to keep inflationary pressures anything but abated. Adding to this scenario, we should not forget the impact of US tariffs on domestic consumer prices. 

Still around data, the bank’s preferred gauges, CPI-Common, Trimmed Mean, and Median, receded in June to 2.6%, 1.8%, and 1.9%, respectively.

What can we expect from Canada’s inflation rate?

Inflation lost some momentum in June, although market participants remain somewhat sceptical about the continuation of this trend into July.

At its latest gathering, the BoC left its policy rate unchanged at 2.25%. While the reduced annual economic growth projection and current economic slack argue against extra tightening, the combination of higher anticipated inflation and confidence in the recent recovery, plus Governor Tiff Macklem’s specific caution against successive rises, means the BoC is attentive to continued oil-driven price pressures.

So far, market participants expect just over 18 basis points of tightening by year-end.

When is the Canada CPI data due, and how could it affect USD/CAD?

Markets will fully focus on Monday at 12:30 GMT, when Statistics Canada publishes July’s inflation prints. If inflation reverses the recent decline, bets on further rate hikes should likely increase, providing fresh legs for the Canadian Dollar (CAD).

Pablo Piovano, Senior Analyst at FXStreet, notes that USD/CAD has been in a steady downtrend since late July, almost entirely tracking developments in the Middle East conflicts and their impact on the Greenback.

Piovano points out that USD/CAD has recently broken below the 1.3900 support level for the first time since early June. In doing so, it has also left behind its provisional 100-day SMA in the 1.3920 region. Further losses carry the potential to confront the critical 200-day SMA in the mid-1.3800s.

If bulls regain control, the interim 55-day SMA around 1.4060 becomes the immediate target, followed by the August ceiling at 1.4080 (August 4) and the weekly peak at 1.4129 (July 28).

“Momentum could prompt some technical correction,” he adds, noting that the Relative Strength Index (RSI) is entering the oversold threshold near 29, while the Average Directional Index (ADX) around 30 suggests a firm trend.