USD/CAD extends gains on softer Canada inflation, firmer US Dollar

• USD/CAD extends gains for a fifth straight day as Canadian inflation undershoots forecasts.
• Annual CPI eases to 2.3%, reinforcing expectations for a steady BoC monetary policy stance.
• A firmer US Dollar and upbeat US data provide additional support to the pair.

The Canadian Dollar (CAD) weakens against the US Dollar (USD) on Tuesday after softer-than-expected headline inflation data reinforced signs of easing price pressure. At the time of writing, USD/CAD is trading around 1.3676, extending gains for a fifth consecutive day.

Data released by Statistics Canada showed that the Consumer Price Index (CPI) was flat on a monthly basis in January, coming in at 0.0%, below the 0.1% forecast and rebounding from December’s -0.2% decline. On an annual basis, CPI eased to 2.3% in January from 2.4% previously, also missing market expectations of 2.4%.

Meanwhile, the Bank of Canada’s (BoC) preferred core inflation measures also reflected a modest rebound. The BoC Core CPI rose 0.2% MoM in January, recovering from December’s 0.4% decline. On a yearly basis, Core CPI eased to 2.6% YoY from 2.8% previously.

The data reinforced expectations that the Bank of Canada (BoC) is likely to keep interest rates on hold in the near term. At its January meeting, policymakers noted that monetary policy remains focused on keeping inflation close to the 2% target, while reaffirming that the central bank stands ready to adjust its stance if the outlook changes materially.

In the January Monetary Policy Report, officials projected CPI to average 2.0% in 2026, slightly below the prior 2.1% estimate, before rising to 2.1% in 2027.

Oil prices are also weighing on the Loonie, given Canada’s status as a major crude exporter. West Texas Intermediate (WTI) crude came under pressure after signs of progress emerged from the second round of high-level US-Iran nuclear talks held in Geneva.

Iran’s Foreign Minister said the two sides had reached “an understanding on the main principles." At the time of writing, WTI is trading near $62.35, down roughly 1.95% on the day.

At the same time, a stronger US Dollar is reinforcing upward pressure on USD/CAD. The US Dollar Index (DXY), which tracks the Greenback’s performance against a basket of six major currencies, extends its recovery and trades near 97.34, up around 0.25%.

On the data front, the NY Empire State Manufacturing Index rose to 7.1 in February, beating market expectations of 6.0, though easing slightly from the previous reading of 7.7. Meanwhile, the ADP Employment Change four-week average increased to 10.3K, up from a revised 7.8K (previously 6.5K).

Market participants are reassessing the timing of Federal Reserve (Fed) interest-rate cuts following last week’s US economic releases. Stronger-than-expected labour figures reduced the likelihood of an immediate rate cut, while softer inflation readings supported the view that the Fed could resume its easing cycle later in the year.

Looking ahead, attention now turns to the Federal Open Market Committee (FOMC) meeting minutes on Wednesday, followed by the Core Personal Consumption Expenditures (PCE) Price Index and the advance estimate of fourth-quarter Gross Domestic Product (GDP) on Friday.