During the early European session on Wednesday, the USD/CAD pair depreciated to 1.3640 amidst a consolidation phase for the US Dollar (USD). Despite softer Canadian CPI inflation data, the pair continued its descent, fueled by mounting expectations of a rate cut from the Bank of Canada (BoC) in June. Investors remained vigilant for insights from the Federal Open Market Committee (FOMC) Minutes and a speech by Federal Reserve official Goolsbee scheduled for later in the day.
Statistics Canada’s report on Tuesday revealed a cooling inflation rate in Canada, with April’s Consumer Price Index (CPI) inflation moderating to 2.7% year-on-year (YoY) from March’s 2.9%. The monthly CPI inflation also softened to 0.5% month-on-month (MoM) in April from the previous reading of 0.6%. Additionally, the BoC’s core CPI climbed by 1.6% YoY in April, a decrease from the 2% rise recorded in March.
The subdued inflation figures have sparked speculation that the BoC may initiate rate cuts at its June meeting. Traders have significantly increased their bets for a rate cut on June 5 to nearly 55%, up from 39% before the release of the data. The potential convergence in interest rate cuts between the BoC and the US Federal Reserve could exert downward pressure on the Canadian Dollar (CAD) and provide support for the USD/CAD pair.
Federal Reserve officials have emphasized the need for caution in adjusting interest rates, preferring to await more encouraging data indicating a sustained trajectory towards the Fed‘s 2% inflation target. Atlanta Fed President Raphael Bostic emphasized the importance of prudence in the initial rate move to prevent erratic inflation fluctuations. Meanwhile, Fed Governor Christopher Waller articulated the necessity of observing several more months of positive inflation data before considering adjustments to borrowing costs.
