As Canada prepares to release the latest inflation data, analysts predict a further decline in the Consumer Price Index (CPI) for July. While the core reading may show an increase, similar to June, the headline CPI is expected to continue its disinflationary trend, potentially adding volatility to the release.
The Bank of Canada (BoC) will also reveal its core CPI, which excludes volatile components like food and energy. In June, the BoC core CPI dropped by 0.1% from the previous month but saw a 1.9% gain over the last twelve months. Meanwhile, the headline CPI rose by 2.7% year-on-year but contracted by 0.1% month-on-month.
These numbers are crucial as they could impact the Canadian Dollar (CAD) and influence expectations for the BoC’s monetary policy. Following a 25 basis point cut in July, the BoC may further ease its policy rate in the future.
Analysis and Breakdown
The upcoming inflation data in Canada is expected to show a continued downward trend in consumer prices. This could lead to speculation that the BoC will implement another interest rate cut in September, potentially bringing the policy rate down to 4.25%. Lower borrowing costs could stimulate spending, but concerns about debt-servicing burdens remain.
BoC Governor Tiff Macklem highlighted the excess supply in the economy, with slack in the labor market putting downward pressure on inflation. The focus now is on boosting growth and job creation to absorb this surplus and achieve a sustainable return to the 2% inflation target.
Overall, the release of the CPI data on Tuesday could impact the USD/CAD exchange rate based on market expectations regarding the BoC’s monetary policy. Any surprises in the data could lead to increased volatility in the currency pair, with support levels and resistance levels identified by analysts for potential price movements.