Canadian Dollar weakens after July CPI undershoots forecasts

• USD/CAD climbs above 1.3830 as the Canadian Dollar weakens following softer inflation data.
• Canada’s CPI holds steady at 1.7% YoY in July, missing expectations of 1.9% and staying below BoC's 2% target for the fourth month.
• Scotiabank’s Derek Holt warns BoC is unlikely to act based on July data alone, citing sticky service inflation and tariff pass-through risks.

The Canadian Dollar (CAD) weakens against the US Dollar (USD) on Tuesday, with USD/CAD climbing above the 1.3830 mark as softer-than-expected inflation data from Canada fuels speculation of a dovish stance from the Bank of Canada (BoC). The release of July’s Consumer Price Index (CPI) showed continued disinflationary trends, undermining the Loonie and pushing the pair higher during the early North American session.

Canada’s inflation data for July, published by Statistics Canada on Tuesday, showed that the annual inflation rate held steady at 1.7%, unchanged from June and below market expectations of a rise to 1.9%. This marked the fourth consecutive month that inflation stayed below the Bank of Canada’s 2% midpoint target, reinforcing the trend of sustained disinflation. On a monthly basis, consumer prices rose 0.3%, a modest acceleration from the prior month’s 0.1% increase but slightly softer than the 0.4% forecast.

Meanwhile, the BoC’s preferred Core CPI measure — which excludes volatile components — rose just 0.1% MoM, unchanged from the previous reading and sharply below the 0.4% forecast. On an annual basis, Core CPI eased to 2.6%, down from 2.7% in June.

While the softer inflation readings have triggered a dovish market reaction, economists caution that the Bank of Canada is unlikely to shift policy based solely on July’s CPI data. According to Scotiabank economist Derek Holt, the central bank’s trajectory will hinge on a broader range of indicators, with two additional inflation reports scheduled before the BoC’s September 17 rate decision. Holt noted that several structural forces continue to sustain inflationary pressure, particularly sticky service prices, rising breadth in pricing momentum, and the emergence of tariff-related effects, both from Canada’s retaliatory measures and supply chain disruptions linked to global trade tensions.

“The core measures exclude tariffs, but not the possible pass-through incidence effects,” Holt explained, suggesting that the challenges facing policymakers extend well beyond headline inflation.

In response to the CPI report, markets moved to price in a 37% chance of a BoC rate cut in September, up from 31% prior to the data, according to Canadian swap market pricing. While the probability remains below 50%, the upward revision reflects growing conviction that the disinflation trend may give the BoC more room to ease policy in the coming months, particularly if subsequent data confirms further cooling.