Canadian Dollar Firm as CPI Stabilizes – Rate Cut Odds Diminish

A Calm in the Currency Storm

The Canadian dollar posted modest gains this week after new data revealed that Canada’s annual inflation rate held steady at 1.7% in May, easing fears of runaway price growth but also reducing expectations for an immediate interest rate cut by the Bank of Canada.
This inflation report, published by Statistics Canada, came as a relief to both policymakers and markets, showing that the economy may be returning to price stability without crashing into a recession — a rare sweet spot in today’s global volatility.
The loonie responded accordingly. By mid-week, the Canadian dollar had firmed to 1.353 per U.S. dollar, gaining approximately 0.3% after the inflation release. Market analysts say the CPI report cooled rate cut bets and restored some faith in the central bank’s calibrated approach to monetary policy.

CPI Data: What the Numbers Say

May’s inflation report was relatively uneventful on the surface, but full of meaningful signals beneath:

• Annual inflation (CPI): Held at 1.7%, same as April
• Core CPI (trim and median): Softened to 3.0%, from a recent average of 3.2%
• Monthly CPI (MoM): Increased by 0.6%, reflecting seasonal price pressures in travel, accommodation, and recreation
• Gasoline prices: Dropped 15.5% year-over-year, keeping overall inflation in check
• Shelter costs: Slowed slightly, up 3.0% YoY vs 3.4% in April, as rents and mortgage interest costs cooled

This data indicates that while headline inflation remains well within the Bank of Canada’s 1%–3% target range, the more persistent core measures are still sticky — though finally showing signs of easing.

Forex Reaction: Dollar Steady, Traders Cautious

Currency markets reacted swiftly. As soon as the CPI figures were released on June 24, the loonie edged higher. Traders saw the report as “not hot enough” to demand emergency action, but “not cold enough” to push the BoC into aggressive easing territory.

“The May CPI is just dovish enough to keep hopes of a rate cut alive, but hawkish enough to delay it,” said Kevin Gunning, FX strategist at BMO. “That’s why you’re seeing the loonie firm and volatility fall.”

Before the release, markets were pricing in a 50–60% chance of a rate cut at the next BoC policy meeting on July 30. Post-CPI, that number dropped to ~34%, according to swap market data.

Bank of Canada’s Next Move: Still in Wait-and-See Mode

The Bank of Canada is caught in a delicate balancing act. Having already cut interest rates by 225 basis points since 2024 to combat economic softness and restore affordability, the central bank must now decide whether to pause or continue cutting.
With inflation stabilizing and shelter costs cooling, some argue the BoC has room to hold rates for longer.

“This is exactly the type of disinflation the BoC wanted,” said TD Economics in a client note. “We now expect them to pause in July and reassess in September.”

Governor Tiff Macklem has been clear that the bank is “data-dependent”, and two critical updates will be published before the July 30 decision — June’s inflation and Q2 GDP, Until then, rate cut odds remain highly fluid.

“Markets were already anticipating this move earlier in the week, when the loonie steadied ahead of the CPI release and cut odds fell.”

What This Means for Canadians

1. For Homebuyers & Mortgage Seekers
The CPI report slightly dims the immediate outlook for cheaper borrowing. While mortgage rates remain well below 2023 peaks, they may not fall further in the short term.

If you’re considering buying a home or renewing your mortgage, this means:

• Fixed mortgage rates may hold steady or dip slightly
• Variable mortgage rates are less likely to fall in the next 30 days
• Waiting for a July rate cut? You might have to wait longer

2. For Consumers
The good news is that inflation is no longer accelerating. Gas prices are falling, grocery inflation has eased, and shelter costs are finally slowing down. This could help stabilize household budgets — especially as wage growth continues in some sectors.

3. For Investors
The firming loonie may temporarily limit export competitiveness, but stable inflation supports broader asset markets, particularly in real estate and fixed income. With rate volatility dropping, investors may see a more predictable bond environment.

Summary Table: Post-CPI Market Signals

Factor	Pre-CPI (June 23)	Post-CPI (June 25)
Inflation Rate (Annual)	1.7%	1.7%
Core CPI (trim, median)	~3.2%	3.0%
BoC Rate Cut Odds (July 30)	~50–60%	~34%
USD/CAD Exchange Rate	1.357	1.353
Gasoline Price (YoY)	-18.1%	-15.5%

Expert Opinions

“The market now sees fewer cuts this year, which strengthens the loonie and encourages investors to return to CAD-based assets.”
— Sarah Kalra, Senior Economist, Scotiabank

“We may still get another 25-basis-point cut by year-end, but it’s no longer guaranteed. The BoC is trying to engineer a soft landing — not a crash.”
— Ben Mohan, FX Risk Advisor, CIBC Capital Markets

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Final Word

The Canadian dollar’s resilience this week shows confidence in the country’s macroeconomic management. With inflation holding at 1.7% and shelter costs easing, the BoC has some breathing room. “Despite domestic stability, U.S. CPI trends are exerting strong upward pressure on Canadian fixed mortgage rates.”
For now, the loonie is riding the wave of stability — but the coming weeks will determine whether that turns into lasting momentum or temporary calm before the next monetary storm.