What to Expect from the May Canada Inflation CPI?

Yesterday the BOC governor Macklem sounded confident that inflation will fall to target, which confirmed that they are preparing to cut interest rates in July. Today we have the CPI inflation report from Canada for May which will be released soon and if it shows a lowdown then a July cut is a done deal, which would send the CAD tumbling lower and USD/CAD surging higher.

Canada CPI for May is expected to tick lower

Earlier this month, USD/CAD rose above its triangle pattern as the Bank of Canada (BOC) adopted a dovish stance while the Federal Reserve (FED) remained hawkish. However, the pair has since retraced by 100 pips. Despite this decline, the price has encountered a support zone from which it is beginning to recover.

This recovery has been bolstered by comments from the BOC governor, who expressed optimism that inflation will return to normal levels. Following the bullish breakout in early June, USD/CAD entered a correction phase but found support near significant moving averages.

USD/CAD Chart H4 – We’re Likely to See A Bounce on A Soft CPI NumberChart USDCAD, H4, 2024.06.24 21:45 UTC, MetaQuotes Ltd., MetaTrader 5, Demo

The pair declined to 1.3650, where it encountered the previous falling resistance trendline, which now serves as a robust support zone. This area has helped stabilize the pair, suggesting potential for further recovery. As the market digests the differing monetary policy outlooks of the BOC and the FED, the support at 1.3650 remains a key level to watch for signs of a sustained rebound.

The latest report showed that underlying inflation indicators have returned to the BoC’s 1-3% target range, enabling the central bank to initiate the first rate cut. The market now sees a 67% chance of another rate cut in July, contingent on this week’s CPI report. In June, the Bank of Canada reduced interest rates by 25 basis points to 4.75%, concluding that the monetary policy did not need to be as restrictive due to continuing signs of easing underlying inflation.

Canada May CPI Inflation Expectations

  • Underlying Inflation Indicators: Returned to BoC’s 1-3% target range, enabling the first rate cut.
  • Rate Cut Expectations: Market sees a 67% chance of another rate cut in July, dependent on this week’s CPI report.
  • June Rate Cut: BoC reduced interest rates by 25 basis points to 4.75%.
  • Reason for Rate Cut: Monetary policy deemed less restrictive due to easing underlying inflation.
  • Inflation Data: Recent data bolsters confidence in gradually reaching the 2% inflation target, despite some risks.
  • Monitoring Focus: Governing Council watching core inflation, demand-supply balance, inflation expectations, wage growth, and business pricing behaviors.
  • Future Outlook: Three-month core inflation indicators suggest a continued downward trend in CPI.

Recent inflation data has bolstered policymakers’ confidence that inflation will gradually approach the 2% target, despite some risks to the inflation outlook. The Governing Council is closely monitoring the trajectory of core inflation, focusing on the economy’s demand-supply balance, inflation expectations, wage growth, and business pricing behaviors. Looking ahead, the BoC noted that three-month core inflation indicators suggest a continued downward trend in CPI and reiterated its commitment to restoring price stability.

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Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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