BoC in Focus as USD/CAD Upside Risks Build

• Core CPI jumped to 13-month highs in April
• Q1 GDP beat on export surge
• Markets now favour BoC hold in June
• USD/CAD supported at wedge base again
• BoC rate decision 9.30am ET, press conference 10.30am ET

Summary

A reacceleration in core inflation has upended near-term BoC rate cut bets, with markets now favouring a pause in June despite stronger-than-expected GDP. Underlying inflation has pushed well above the bank’s 1–3% target band, putting added weight on what Governor Macklem signals during his post-decision press conference. While rate expectations have shifted, USD/CAD continues to find support at wedge base levels, keeping the risk of a near-term bounce alive.

Canada Growth, Core Inflation Deliver Upside Surprises

Ahead of the bank’s rate decision, both Canadian economic growth and underlying inflation surprised on the upside, sparking a massive unwind in near-term rate cut bets.
GDP topped expectations in Q1 thanks to a jump in exports ahead of U.S. tariffs, growing at an annual pace of 2.2% despite weakness in household spending and broader domestic demand. The median forecast looked for growth of just 1.7%.

Source: TradingView

However, it was the reacceleration in core inflation that really caught the market’s eye a week earlier, with CPI median and trim both rising to 13-month highs in April despite the headline rate falling on lower energy prices.

The average of the two underlying inflation measures accelerated to 3.15% in the year to April, not only above the Bank of Canada’s forecasts but also outside the 1–3% range it targets over the medium term.

That saw rate cut bets pared back sharply when the report was released in late May, with markets now favouring that the BoC will keep interest rates steady at 2.75% in June.

BoC June Cut Deemed Highly Unlikely

Source: Bloomberg

Looking at implied probabilities from swaps markets, a 25 basis point reduction in July—when the BoC will provide updated forecasts—is deemed around a two-in-three chance, with a full cut not priced until September.

By the end of 2025, traders see the risk of two full 25bp cuts as a coin toss, putting plenty of emphasis on what BoC Governor Tiff Macklem guides towards when he holds his press conference after the rate decision is delivered.

When the BoC last met in April, the monetary policy statement said the bank’s focus will be on ensuring “Canadians continue to have confidence in price stability through this period of global upheaval.”

“This means we will support economic growth while ensuring that inflation remains well controlled,” it said.

It said it will proceed carefully, with particular focus on the extent to which higher tariffs reduce demand for Canadian exports, how much it spills over into business investment, employment and household spending, how much and how quickly cost increases are passed on to consumer prices, and how inflation expectations evolve.

USD/CAD: Bearish Trend Losing Steam

While USD/CAD traded at the lowest level since early October earlier this week, you can’t help but notice that of the two recent dips beneath 1.3700, both have been quickly bought. Zooming out, the pair continues to coil within a falling wedge pattern, attracting buying on five separate occasions at downtrend support, including on Monday.

Source: TradingView

While the longer-term bias continues to favour selling rallies, nearer-term, it would not surprise to see some upside emerge, especially with bullish divergence now evident between RSI (14) and price. Bearish momentum that delivered a near nine big-figure reversal from the highs is showing signs of waning.

On the topside, 1.3750 is a level that has acted as both support and resistance on multiple occasions over both the short and medium term, making that an initial focal point for traders. If the price were able to get a foothold above, it would bring a potential retest of wedge resistance on the radar.

A clean bullish wedge break may spark renewed buying interest. 1.3800 and 1.3850 both saw limited price action on the way down, although 1.3900 screens as a more defined resistance level, with the 200-day moving average after that.

Alternatively, if Monday’s low of 1.3675 is taken out, it may encourage other bears off the sidelines, putting the broader downtrend on a collision course with the intersection of horizontal support at 1.3650 and uptrend dating back to the lows set in December 2023. If this support zone buckles, 1.3540 and 1.3419 are levels to keep on the blotter.

-- Written by David Scutt

Follow David on Twitter @scutty