Loonie Slips as Soft CPI Fuels BoC Rate Cut Bets

Key Takeaways:

*Softer headline CPI at 1.7% fuels rate cut speculation, though sticky core inflation near 3% complicates BoC’s stance.

*Rising shelter and rent costs offset disinflationary trends, leaving policymakers in a difficult balancing act.

*CAD direction now hinges on September CPI release and Powell’s remarks, with global risk appetite shaping volatility.

Market Summary:

The Canadian Dollar extended its decline to a three-week low against the U.S. Dollar after July’s softer inflation data reinforced speculation that the Bank of Canada (BoC) may be preparing to ease policy sooner than expected. Headline CPI slowed to 1.7% year-on-year from 1.9% in June, marking a fourth straight month below the BoC’s 2% target. The drop was primarily driven by a sharp 16.1% annual fall in gasoline prices, reflecting both weaker global crude and the removal of the federal carbon levy.

Beneath the headline, however, inflationary pressures remain uneven. The BoC’s preferred core measures—CPI-trim and CPI-median held firm at 3.0% and 3.1% respectively, highlighting sticky underlying price dynamics. Shelter costs also accelerated for the first time since early 2024, rising 3.0% annually as rent inflation surged to 5.1%. This split inflation picture has left policymakers walking a fine line. Some economists argue that a sharp slowdown in the three-month annualized core rate to 2.4% strengthens the case for a September cut, especially alongside weaker GDP and employment data. Others warn that persistent service inflation, higher food prices, and potential tariff pass-through effects argue for caution.

Markets have tilted toward the dovish view, with rate-cut odds for September rising to 39% after the CPI release. For now, the Loonie’s direction will be heavily influenced by the evolution of these policy expectations, as well as global risk appetite. The next CPI print on September 16th will serve as the decisive marker ahead of the BoC’s critical September 17th policy meeting.

Technical Analysis

USDCAD, H4

USD/CAD has extended its bullish momentum, pushing above 1.3855 and currently testing the 1.3870 resistance zone. The breakout follows a period of consolidation, and the pair is now eyeing the next key resistance at 1.3967. Price action remains supported by the rising 20- and 50-period moving averages, confirming a strong short-term uptrend.

Momentum indicators point to further upside but warn of possible overextension. The Relative Strength Index (RSI) has climbed to 73, moving into overbought territory, suggesting the pair may be due for a short-term pullback or consolidation. Meanwhile, the MACD maintains a bullish crossover with expanding histogram bars, reflecting strong buying pressure.

On the downside, immediate support lies at 1.3855 and 1.3750. A break back below these levels could invite profit-taking and push the pair toward 1.3751. However, as long as USD/CAD holds above 1.3790, the broader bias remains bullish, with the possibility of a continuation toward 1.3967 if momentum sustains.

In summary, USD/CAD is in a bullish breakout phase, but with RSI in overbought territory, traders should be cautious of potential consolidation before another leg higher.

Resistance levels: 1.3855, 1.3967
Support levels: 1.3752, 1.3653