Canada's inflation eases, Canadian dollar edges lower

The Canadian dollar continues to have a quiet week. In the North American session, USD/CAD is trading at 1.3920, down 0.21% on the day.

Canadian CPI eases to 1.7%, core CPI higher

Canada released the April inflation report, which indicated that headline and core inflation were moving in opposite directions. Headline CPI dropped sharply to 1.7% y/y, down from 2.3% but shy of the market estimate of 1.6%. This was the lowest annual inflation rate in seven months. The sharp drop was driven by the end of the consumer carbon tax, with gasoline prices dropping 18% lower compared to April 2024.

Core inflation accelerated in April, with two key indicators rising to an average of 3.15%, compared to 2.85% in March. This was above the market estimate of 2.9%.

Will BoC cut rates in June?

The money markets have responded to the inflation data, lowering the probability of a rate cut at the June 4 meeting to 48%, down from 65% prior to the inflation release.

The Bank of Canada has been aggressive in its easing cycle, trimming rates seven straight times from June 2024 until April, when it held rates. The cash rate is currently at 2.75% but the BoC is hesitant to lower in the midst of the uncertainty over the US trade tariffs, which have led to sharp swings in the stock markets.

There are no US events on the calendar and the markets will be all ears as a host of FOMC members make public statements today. Investors will be looking for insights into the Fed's rate path. The Fed is widely expected to hold rates in June and may cut as little as twice in the second half of the year. That could change, depending on inflation, the US labor market and Trump's tariffs.

USD/CAD Technical

• USD/CAD is testing support at 1.3936. Below, there is support at 1.3911
• There is resistance at 1.3952 and 1.3977