USD/CAD trades on the back foot on Monday as the Canadian Dollar (CAD) draws support from a softer US Dollar (USD), while traders show a muted reaction to the latest Canadian inflation data as attention remains firmly focused on heightened geopolitical tensions surrounding the ongoing US-Iran war.
At the time of writing, the pair is trading around 1.3659, pausing after a three-day winning streak that pushed the pair to two-week highs. Meanwhile, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, trades near 100, easing from the 10-month high of 100.54 reached on Friday.
Headline Consumer Price Index (CPI) rose 0.5% MoM in February, slightly below market expectations of 0.6% but rebounding from 0.0% in January, while the annual rate slowed to 1.8% YoY from 2.3%, coming in just under the 1.9% forecast.
The Bank of Canada’s (BoC) core CPI increased 0.4% MoM, accelerating from 0.2% in January, although the annual core measure eased to 2.3% YoY from 2.6%.
The data point to easing price pressure, reinforcing expectations that the BoC will maintain a steady policy stance as policymakers remain focused on keeping inflation close to the 2% target.
However, last week’s disappointing employment data raises the possibility that the central bank could reassess its monetary policy stance if the labor market continues to deteriorate.
Attention now turns to the BoC’s interest rate decision due on Wednesday, where policymakers are widely expected to keep the benchmark rate unchanged at 2.25%.
At the same time, the BoC could face a policy dilemma amid elevated Oil prices driven by supply disruptions through the Strait of Hormuz. While higher crude prices could add to inflation risks, Canada is also a major Oil exporter, meaning stronger energy prices may support economic growth.
As a result, policymakers may prefer a wait-and-see approach as they assess the economic impact. A Reuters poll published on March 13 showed that 25 of 33 economists expect the central bank to keep rates unchanged at least through 2026.
Markets are also reassessing the Federal Reserve’s (Fed) policy outlook, with traders scaling back expectations for rate cuts this year. The Fed is widely expected to keep interest rates unchanged in the 3.25%-3.50% range at Wednesday’s policy meeting. Investors will closely watch Fed Chair Jerome Powell’s forward guidance, along with the updated Summary of Economic Projections (SEP) and the dot plot.
Source: https://www.fxstreet.com/news/usd-cad-drifts-lower-as-canada-cpi-shows-mixed-inflation-signals-ahead-of-boc-decision-202603161354
