On Tuesday at 12:30 GMT, Statistics Canada is scheduled to release the highly anticipated Consumer Price Index (CPI) data for May, which is expected to significantly influence market dynamics and the value of the Canadian Dollar (CAD). The timing of the Bank of Canada’s (BoC) next interest rate decision hinges crucially on these inflation figures.
Analysts forecast that the Canadian CPI will show a slight deceleration in annual inflation to 2.6% in May from 2.7% in April. On a monthly basis, CPI inflation is projected to ease to 0.3% compared to April’s 0.5% growth. Meanwhile, the core CPI, excluding volatile items like food and energy, is anticipated to maintain stability with a 1.6% annual increase and a 0.2% rise on a monthly basis.
Despite remaining below the central bank‘s 2.0% target for the fifth consecutive month, the CPI figures will be closely scrutinized for their potential to sway the BoC’s stance on monetary policy. Markets are currently pricing in the likelihood of another interest rate cut at the July 24 policy meeting, with the upcoming CPI report seen as pivotal in confirming or altering these expectations.
James Orlando, Director of Economics at TD Securities, emphasized the significance of the CPI data, stating, “It would probably take a bad reading, either this month or next, to stop the Bank of Canada from cutting.” This sentiment underscores the market’s sensitivity to any surprises in the inflation metrics.
The impact on the Canadian Dollar, particularly against the US Dollar (USD/CAD), could vary depending on the CPI outcomes. A stronger-than-expected CPI report, indicating higher inflationary pressures, might bolster the CAD by reducing expectations of imminent rate cuts by the BoC. In contrast, weaker CPI data could reinforce expectations of further monetary easing, potentially weakening the CAD.
Technical analysis by FXStreet’s Senior Analyst, Dhwani Mehta, suggests key levels for USD/CAD trading post-release. Currently near the 1.3690 confluence zone, where key moving averages intersect, USD/CAD faces resistance. A breach above this level could drive the pair towards recent highs near 1.3765 and potentially to the 1.3800 mark. Conversely, a downside break below support levels at 1.3665 and further down to the 100-day SMA at 1.3619 may signal renewed CAD strength.
As the market awaits the CPI data, expectations and technical levels will guide investor sentiment and trading decisions, shaping the near-term outlook for USD/CAD amidst evolving monetary policy expectations in Canada.
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