Canadian Dollar Forecast: Cool CPI Prompts a USD/CAD Bounce Off 50-Day EMA Support

USD/CAD Key Points

• Canadian inflation cooled more sharply than expected in June, easing concerns that the recent energy-driven increase was spreading across the broader economy.
• Headline CPI slowed to 2.8% y/y from 3.2% in May; Excluding gasoline, inflation held steady at 2.2% y/y.
• USD/CAD remains near a 1-month low, but a possible bullish engulfing candlestick pattern that would strengthen the argument for a near-term bottom.

A week after a similarly below-expectation report from the US, Canadian inflation cooled more sharply than expected in June, easing concerns that the recent energy-driven increase was spreading across the broader economy. Headline CPI slowed to 2.8% y/y from 3.2% in May, while prices fell -0.4% m/m. On a seasonally adjusted basis, CPI declined -0.1%.

The slowdown was largely driven by gasoline, which fell -10.2% from May as global oil prices retreated. Gasoline remained 20.5% more expensive than a year earlier, but that was well below May’s 33.2% increase. Excluding gasoline, inflation held steady at 2.2% y/y.

The underlying details were also encouraging. The Bank of Canada’s preferred CPI-trim and CPI-median measures eased to 1.8% and 1.9%, respectively, leaving their average below the 2% target. Grocery inflation remained relatively firm at 3.9%, while World Cup-related demand pushed accommodation and air travel prices sharply higher. However, those increases were concentrated rather than widespread and are likely to dissipate soon with the tournament wrapping up this weekend.

For the Bank of Canada, the report supports the view that higher energy costs have not generated significant second-round inflation yet. With economic growth beginning to recover, the most likely outcome remains an extended hold at 2.25%, assuming oil prices stabilize and core inflation stays contained, though energy volatility from the ongoing conflict in Iran could still have a spillover impact on Canada’s oil-dependent economy in the coming months.

Canadian Dollar Technical Analysis: USD/CAD Daily Chart

Source: Tradingview, StoneX

From a technical perspective, USD/CAD is bouncing from support at its 50-day EMA near 1.4025, helped along by this morning’s softer-than-anticipated Canadian data. The North American pair remains near a 1-month low, but the combination of a BOC in stasis and the potential for safe-haven demand for the US dollar amid the re-escalating Iranian conflict could boost the pair as we move through the week. Current price action is showing a possible bullish engulfing candlestick pattern that would strengthen the argument for a near-term bottom.

Looking ahead, previous-support-turned-resistance at 1.4130 is the next level of resistance to watch before the 1+ year highs in the low-1.4200s, whereas a break below the 50-day EMA near 1.4020 could target the 38.2% Fibonacci retracement of the May-July rally below 1.4000.

-- Written by Matt Weller, Global Head of Research

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