The USD/CAD pair drifted lower to 1.3640 in Wednesday’s early European session following the announcement of the annual Canadian CPI inflation rate slowing to 2.7% in April from 2.9% prior. This decrease in inflation rate has increased the likelihood of the Bank of Canada (BoC) implementing a rate cut in June. Despite this, the US Dollar (USD) has been consolidating, causing the pair to edge lower.
Investors are eagerly awaiting the FOMC Minutes and the Federal Reserve’s (Fed) Goolsbee speech later in the day to gain more insight into the economic outlook. The recent softer Canadian CPI inflation data, particularly the cooling of inflation to 2.7% in April, has fueled speculations about a potential rate cut by the BoC. The Canadian Consumer Price Index (CPI) inflation dropped to 2.7% YoY in April from 2.9% in March, in line with market expectations.
The easing inflation data has led to speculation that the BoC might begin cutting rates in the upcoming June meeting. Traders have significantly increased their bets for a rate cut on June 5 to nearly 55%, up from 39% before the data was released. The expected pace of interest rate cuts from both the BoC and the US Fed could put selling pressure on the Canadian Dollar (CAD) and act as a tailwind for the USD/CAD exchange rate.
While the BoC is considering rate cuts, the Fed remains cautious and prefers to wait for more encouraging data to ensure that inflation is moving towards its 2% target. Atlanta Fed President Raphael Bostic emphasized the importance of caution in making the first rate move to prevent inflation from becoming volatile. The Fed’s stance on inflation and interest rates could have a significant impact on the future movements of the USD/CAD exchange rate.
The recent slowdown in Canadian CPI inflation rate has sparked speculations about potential rate cuts by the Bank of Canada. This, combined with the cautious approach of the Federal Reserve towards inflation, has created uncertainty in the currency markets, particularly the USD/CAD exchange rate. Traders and investors will closely monitor upcoming economic data releases and central bank announcements to gauge the direction of the exchange rate in the near future.