Canadian Dollar firms after hotter-than-expected inflation data

The Canadian Dollar (CAD) strengthened following hotter-than-anticipated inflation data on Monday. The US Dollar (USD) faced pressure, while robust Canadian inflation metrics supported the CAD. The Canadian Consumer Price Index (CPI) climbed 3.0% year-over-year in July, surpassing the 2.9% forecast. On a monthly basis, the CPI increased by 0.5%, in line with expectations and reversing the previous month's decline of 0.4%.

Underlying inflation also rose. The Bank of Canada's (BoC) core CPI measure surged 2.3% year-over-year, up from 2.1%, while the month-over-month figure grew by 0.2%, following a 0.1% increase the prior month. Elevated gasoline and travel expenses contributed to the surge in headline inflation. The conflict in the Middle East, particularly the blockade of the Strait of Hormuz, added upward pressure on fuel prices.

Despite the rise in headline inflation, the BoC's preferred core measures remained close to its 2% target, implying the latest data are unlikely to alter the central bank's near-term policy stance. The BoC will unveil its next monetary policy decision on September 2 and is expected to keep interest rates unchanged at 2.25%. Meanwhile, the US Dollar remains weak due to traders reducing expectations of a Federal Reserve (Fed) rate hike after recent US economic data indicated weaker labor demand, lower consumer spending, and easing inflation pressures.

The US Dollar Index (DXY), tracking the Greenback against six major currencies, traded near 99.45 after hitting 99.30, its lowest since June 5. Middle East developments remain significant, as shipping through the Strait of Hormuz remains heavily restricted, keeping oil prices high and benefiting the commodity-linked CAD.