Canadian CPI slightly higher than expected 🔼 USDCAD reacts

• Gasoline prices rose 25.7% year over year, up from 20.5% in June, while CPI excluding gasoline stayed much softer at 2.2%, suggesting energy costs have not yet spread broadly across the economy.
• Core inflation remained subdued, with the Bank of Canada’s preferred measures averaging about 1.95%, still below the 2% target.
• Other inflation pressures came from travel tours and airfares, which rose strongly amid World Cup demand and higher jet fuel costs.
• Grocery inflation eased to 3.1% from 3.9%, while shelter inflation slowed to 1.3%, its weakest pace since May 2020.
• The inflation report comes alongside firmer economic data, including a 6.4% unemployment rate, strong job creation and preliminary GDP growth of 3.4% annualized in Q2, which may keep the Bank of Canada cautious despite soft core inflation.

The latest macroeconomic data suggest that the balance of risks for USDCAD may be gradually shifting to the downside. Canada’s July CPI accelerated year over year and exceeded expectations, while several core inflation measures also came in above consensus. At the same time, U.S. inflation data were less supportive for the dollar, with CPI matching forecasts and PPI showing weaker price pressures. This divergence could strengthen the CAD if markets begin to price a relatively more hawkish Bank of Canada stance compared with the Fed. Canada’s labor market and growth data also remain relatively firm, reducing the urgency for aggressive monetary easing. If Canadian inflation proves more persistent while U.S. price pressures continue to soften, the relative policy outlook could increasingly favor the CAD and create further downside pressure on USDCAD.

Source: XTB Research, Statiscis Canada, Macrobond

Source: xStation5