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Deutsche Bank notes that Canada's weaker-than-expected CPI data has reduced market expectations for an imminent Bank of Canada (BoC) interest rate hike. The report highlights that the 2.6% annual CPI reading in April, below forecasts of 3.0%, weakens the central bank's rationale for tightening monetary policy in the near term. This follows a 25-basis-point rate hike in April, bringing the benchmark rate to 4.75%. The bank suggests the BoC may adopt a more cautious stance, potentially delaying further hikes until later in 2024.
The news could weigh on the Canadian dollar (CAD) against majors like the USD and EUR, as lower rate hike expectations typically weaken a currency. Traders may also reassess the USD/CAD pair, which has been volatile amid shifting BoC policy signals. The market is now pricing in a 65% probability of a rate cut by year-end, according to the CME FedWatch tool, though BoC officials have emphasized a data-dependent approach.
Investors should monitor upcoming BoC policy statements and inflation data for clarity. A sustained slowdown in CPI could push the central bank toward rate cuts, while stronger-than-expected readings might delay easing. The USD/CAD pair remains a key focus for forex traders, with technical levels around 1.3500-1.3700 likely to be tested in the coming weeks.
