The Canadian Dollar is responding to new data from Statistics Canada, which shows that inflation did not change in May. The USD/CAD is trading at about 1.3710 as markets rethink the chance for rate cuts. Canada’s May inflation report reveals that the BoC Core Consumer Price Index (CPI) rose by 0.6% from the previous month, up from 0.5%. Year-over-year, it stays steady at 2.5%. The overall CPI also increased by 0.6% month-on-month, meeting expectations at 1.7% year-on-year.

Core CPI and Inflation Concerns

The BoC Core CPI excludes unstable items like food and energy, providing a better view of underlying inflation. With the Bank of Canada’s key interest rate at 2.75%, Governor Tiff Macklem has expressed worry about tariffs and rising production costs, closely watching CPI trends and business confidence. The ongoing price pressures may cause the BoC to postpone rate cuts as they observe inflation trends. Market data shows a 38% chance of holding rates steady at the BoC’s July meeting. Currently, USD/CAD is trading between the 20-day SMA at 1.3697 and the 50-day SMA at 1.3798. Since inflation held steady in May and core figures slightly increased, the Bank of Canada is likely to keep a cautious approach. Prices, especially excluding food and fuel, increased by 0.6% from April, which surprised some. While year-over-year changes are stable, they’re not cooling off quickly. For short-term traders, this prompts careful consideration of the gap between policy expectations and real economic signals. Policymakers are hesitant to act too soon. Governor Macklem’s recent remarks suggest they are monitoring trade costs and production expenses closely. The fact that overall inflation matched forecasts gives the BoC some leeway, but it doesn’t rule out potential movement. The current market pricing—less than a 40% chance of holding rates next month—reflects this careful balance.

Market Reactions and Strategic Positioning

In the foreign exchange markets, these inflation figures are reinforcing support for the loonie. The USD/CAD pair is stuck in a tight range, just above the 20-day moving average, waiting to reach the 50-day average. This narrow range could become a launchpad for directional trades once policy clarity improves. Until then, movements may be driven by speculation rather than fundamental changes. Sellers who expected lower inflation are likely reevaluating their positions or choosing to stay on the sidelines. The slight rise in core inflation should raise concerns, especially for those considering early rate cuts. The data suggests that may be premature. Longer positioning needs caution. Inflation, especially in trimmed mean readings, remains complicated for central banks seeking clear signals before easing. The upside for the Canadian dollar may be limited unless global risk appetite improves or energy prices strengthen the local economy. Flexibility is essential in this setup. Successful traders in similar situations have kept their positions light and used options to stay engaged without uncontested directional exposure. The market is moving slower than expected, so confidence in trends will stay muted until more data clearly indicates a direction. Monitoring the curve, especially short-end expectations, may provide more insight than headline currency levels in the coming days. Ignoring short-term implied probabilities and focusing on the movement between two-year and five-year yield spreads often reveals a more accurate picture of institutional intentions. This approach aligns well with trend direction in pairs like USD/CAD when central banks are at turning points. Those already invested should pay attention to sentiment shifts during North America’s upcoming earnings season. If corporate reports indicate higher costs affecting margins, it would influence inflation persistence and the BoC’s response. This potential reaction—or lack thereof—remains a key factor. Create your live VT Markets account and start trading now.

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