Canada’s inflation report for August is due Tuesday and is expected to show a modest pickup in price pressures, just as the Bank of Canada (BoC) prepares to decide on interest rates the following day. The central bank is widely expected to cut its policy rate by 25 basis points to 2.50%, aiming to support a cooling economy.
Headline CPI to Tick Up, Still Below Target
Economists anticipate that headline inflation will climb slightly above the BoC’s 2% target, following a 1.7% year-over-year increase in July. On a month-to-month basis, prices are forecast to rise by just 0.1%.
While signs suggest inflation may be gradually easing, analysts remain cautious. One key risk on the horizon is the potential impact of U.S. tariffs, which could drive domestic prices higher and complicate the BoC’s path forward.
BoC’s Preferred Core Measures Still Elevated
The central bank will also be paying close attention to its core inflation gauges, which strip out volatile components like food and energy. In July, core inflation rose 2.6% year-over-year, with only a 0.1% monthly increase.
Although headline CPI will capture market attention, the BoC is focused on the details—specifically the trim, median, and common core inflation metrics. The first two have been creeping higher, signaling sticky inflation, while the common CPI remains more subdued, giving policymakers room to maneuver.
🏦 What’s the BoC Thinking?
At its July 30 meeting, the Bank of Canada held rates steady at 2.75%, in line with market expectations. Governor Tiff Macklem said the decision was due to lingering inflation risks, as core readings continued to hover around 3%.
Still, Macklem stressed that not all inflationary pressures are permanent. He pointed to a stronger Canadian Dollar, slower wage growth, and an economy operating below its full potential as signs that inflation could ease in the months ahead.
📅 When is the CPI Data, and How Could it Move USD/CAD?
- Release Date & Time: Tuesday at 12:30 GMT
- Impact: High. A stronger-than-expected inflation print may delay further BoC rate cuts and boost the Canadian Dollar (CAD) in the short term.
- Risk Focus: Tariff-related cost pressures could surprise to the upside, keeping attention on Canada–US trade dynamics.
According to FXStreet Senior Analyst Pablo Piovano, USD/CAD remains in a consolidative range, currently hovering near 1.3850. Renewed CAD strength could see the pair drift lower toward support at 1.3730–1.3720, while stronger resistance lies at the August high of 1.3924 and the psychological 1.4000 mark.
Further downside support levels include:
- 1.3575 – Weekly base (July 23)
- 1.3556 – June low (July 3)
- 1.3538 – Yearly low (June 16)
As long as the pair trades below the 200-day Simple Moving Average (SMA), Piovano sees the bearish bias intact.
📊 Momentum Indicators: A Mixed Bag
- RSI (Relative Strength Index): Easing toward 55, suggesting waning upside momentum.
- ADX (Average Directional Index): Sitting near 18, indicating that the overall trend remains weak and lacks clear direction—for now.
📘 Bank of Canada FAQs
🔹 What is the Bank of Canada and what does it do?
The Bank of Canada (BoC) is the country’s central bank, responsible for maintaining price stability (keeping inflation between 1–3%). It sets interest rates during eight scheduled meetings per year. Higher interest rates typically strengthen the Canadian Dollar, while lower rates can weaken it.
🔹 What is Quantitative Easing (QE)?
QE is a tool the BoC uses during times of crisis. The bank prints money to buy bonds from financial institutions, increasing liquidity. QE usually weakens the CAD. It was used during the 2009 financial crisis.
🔹 What is Quantitative Tightening (QT)?
QT is the reverse of QE. The BoC stops buying bonds and lets existing holdings mature without replacement. QT generally supports a stronger Canadian Dollar, as it tightens financial conditions.