The Canadian Dollar (CAD) gained ground against the US Dollar (USD) on Monday, with USD/CAD trading around 1.3860, down 0.11% on the day, as investors shifted focus to the upcoming release of Canada's July Consumer Price Index (CPI) data later in the day [1]. The recent decline in the US Dollar was attributed to a series of disappointing US economic releases, including an unexpected drop in Retail Sales, which, along with softer inflation, has led markets to reduce the probability of a Federal Reserve rate hike at the next meeting to around 30%, down from nearly 40% a week earlier, according to the CME FedWatch tool [1].
Market participants are anticipating that Canada's headline inflation will rise 2.9% year-over-year in July, up from 2.8% in June, with prices expected to increase 0.7% on a monthly basis [1]. Strategists at Brown Brothers Harriman note that USD/CAD is testing key support at the 200-day moving average (1.3849) ahead of the CPI release, and they forecast headline CPI at 2.9% y/y, core CPI (excluding food & energy) at 1.8% y/y, and the average of trim and median core CPI at 1.85% for a second consecutive month, which is below the Bank of Canada's Q3 forecast of 2.0% [1].
TD Securities expects only a modest firming in inflation, projecting headline CPI to increase by 0.1 percentage points to 2.9% y/y in July, with a 0.4% m/m rise, driven by food and energy, partially offset by travel services. They also forecast CPI-trim/median to remain stable at 1.85% y/y, which would keep core inflation below the BoC's July Monetary Policy Report projections and allow the central bank to look through higher oil prices in September [1].
The Bank of Canada maintained its policy rate at 2.25% for the sixth consecutive meeting in July, with Governor Tiff Macklem emphasizing a willingness to look through short-term energy shocks but reiterating the commitment to prevent persistent inflation [1]. Brown Brothers Harriman analysts suggest that while Canada's favorable growth-inflation mix supports the CAD, the negative output gap could limit further upside, as markets are currently pricing in 67 basis points of BoC rate hikes over the next twelve months [1]. TD Securities also highlighted that manufacturing sales rose by 0.1% m/m in June, slightly above market consensus, despite a drag from lower energy prices [1].
CONCLUSION
The Canadian Dollar has strengthened ahead of the July CPI release, with markets closely watching inflation data for clues on the Bank of Canada's next moves. While headline inflation is expected to firm modestly, core measures are projected to remain below BoC forecasts, supporting a cautious policy stance. Market sentiment remains moderately positive for the CAD, but further gains may be capped by the prevailing negative output gap and subdued core inflation.