**USD/CAD Forecast: Canadian Dollar Weakens on Rate Cut Bets Following Soft CPI**
*Original article by Kenny Fisher, Forex Crunch*
The USD/CAD currency pair has recently gained upward momentum as investors increase their bets on a potential rate cut from the Bank of Canada (BoC) following the release of disappointing Canadian inflation figures. Market sentiment has shifted as weaker-than-expected CPI data fuels speculation that policymakers may be forced to ease monetary policy in the coming months. This article delves into the factors driving USD/CAD price action, how inflation trends impact Bank of Canada decisions, and what traders can expect in the near future.
## Weak Canadian CPI Report Heightens BoC Rate Cut Expectations
The Canadian economy delivered another soft inflation report, prompting markets to reassess their outlook for interest rates. According to Statistics Canada, headline CPI rose just 2.8% year-over-year in July, easing from the 2.9% reading in June and falling below the BoC’s 3.0% target midpoint. Furthermore, core inflation measures also cooled, reinforcing the view that disinflationary pressures are gaining traction.
### Key Highlights from the July CPI Report:
– Headline CPI: 2.8% year-over-year (YoY) vs. 2.9% in June
– Common Core CPI: 2.3% vs. 2.4% previously
– Median Core CPI: 2.6%, down from 2.8%
– Trimmed Mean CPI: 2.5%, down from 2.7%
These figures suggest that inflation has been moderating consistently, heightening the likelihood of a policy pivot from the BoC. The central bank has previously signaled a data-dependent approach, stressing the importance of inflation and labor market indicators. With recent data showing a gradual easing in consumer prices and signs of economic slowdown, the BoC now faces mounting pressure to lower interest rates to offer support to the economy.
## Market Reactions and USD/CAD Response
Investors immediately responded to the soft data by increasing their bets on a rate cut before the end of 2025. The Canadian dollar weakened against its U.S. counterpart, causing USD/CAD to spike above 1.3550 for the first time since May. The loonie also showed vulnerability against other major currencies like the euro and the Japanese yen.
### Post-CPI Market Reaction:
– USD/CAD surged to 1.3560 following the CPI release
– Implied probabilities of a 25-basis-point cut in October rose to over 60% (from just 42% previously)
– Government bond yields declined as traders priced in reduced rate expectations
Analysts at CIBC and RBC Capital Markets both noted that if inflation continues to trend downward, the BoC may initiate policy easing as soon as October or December 2025. Money markets are now pricing in nearly two cuts by mid-2026, indicating a clear shift in monetary policy expectations.
## Contrasting Central Bank Paths: BoC vs. the Federal Reserve
One of the key drivers of the USD/CAD exchange rate is the evolving divergence between the Bank of Canada and the U.S. Federal Reserve. While both central banks face cooling inflation and slowing growth, the Fed appears more hesitant to signal imminent rate reductions. Recent comments from Federal Reserve officials have reflected a cautious tone; policymakers continue to emphasize the need for more progress on inflation before confirming any rate cut trajectory.
This divergence gives the U.S. dollar a relative advantage over the Canadian dollar:
– The Fed’s higher-for-longer stance supports the USD with higher interest rate differentials
– Capital inflows into U.S. assets increase amid investor appetite for yield
– The Canadian dollar remains subdued due to growing uncertainty about domestic economic resilience
This policy divergence has led to renewed buying interest in USD/CAD, pushing the pair above key technical resistance levels.
## Technical Outlook: USD/CAD Poised for More Gains
Read more on USD/CAD trading.