Statistics Canada will release the July inflation figures on Tuesday. Market participants are understandably hanging on every word of this key event. Here’s what the data tells us about our shared economic recovery so far. These participatory insights will help inform the Bank of Canada’s (BoC) future policy decisions. Accelerating inflation is around the corner. Fed decision that will determine the fate of the Canadian Dollar, which in recent days has given up ground vs. the greenback.
The BoC’s returned core measures will be crucial in determining where the inflation landscape stands. Consensus estimates are calling for a 0.4% mom increase in the BoC Core CPI. This would be a dramatic increase in pace from the current rate of just 0.1%. This increase may be an early sign of easing inflationary pressures. In light of this perhaps policymakers should reconsider how they respond to interest rates.
Further, the year-over-year rate of the BoC Core CPI is expected to hold firm at 2.7%. This relative stability would indicate that underlying inflation is clearly more persistent than shown by the past volatility in headline measures. Headline CPI is anticipated to increase by 0.4% MoM, a jump from the 0.1% logged in June. We think the annual rate of headline CPI could fall just a touch to 1.7% from 1.9%. This dramatic change has produced confusing signals from price trends.
While waiting for these important inflation numbers, the Canadian Dollar has suffered a sharp pullback. Following a short period of appreciation, the currency is coming under renewed downward pressure against the U.S. Dollar. At the start of the early American session, the USD/CAD pair is recovering above the 1.3800 psychological level. The pair recoups from an intraday bottom of 1.3783. This change in sentiment is telling of traders’ attitude going into next week’s data release.
Market watchers note that everyone is still waiting in the wings, not ready to make big plays. This warning comes right before Canada’s July Consumer Price Index announcement. This dovish tilt highlights the prevailing uncertainty on how this new inflation data will shape Fed policy and trading conditions going forward. A weaker-than-expected headline CPI could reignite speculation about potential rate cuts later this year, further complicating the BoC’s decision-making process.
With core inflation persisting in a sticky manner, these uncertainties likely will not afford much room for the BoC to remain aggressive in either direction. Instead, policymakers today tread a far more cautious path that puts great faith into the data yet to come to dictate their next moves. Data-driven approaches are becoming the new normal for central banks. They’re all doing it while addressing very difficult economic environments, including persistent inflation spikes.