• USD/CAD falls sharply as the Canadian Dollar appreciates after the stubbornly higher Canadian inflation report for May.
• The hotter-than-expected US inflation report has trimmed expectations for the BoC’s subsequent rate cuts.
• Fed Bowman sees interest rates remaining at their current levels for the entire year.

The USD/CAD pair witnesses a sharp sell-off in Tuesday’s New York session. The Loonie asset comes under pressure as the May Consumer Price Index (CPI) report from Statistics Canada showed that price pressure surprisingly rose higher than April’s reading. This has dented expectations of subsequent rate cuts by the Bank of Canada (BoC). The BoC commenced its policy-easing campaign at its policy meeting in early June.

The CPI report showed that annual headline inflation unexpectedly grew by 2.9%. Investors expected price pressures to have declined to 2.6% from the prior release of 2.7%. On month, headline CPI grew strongly by 0.6% than the former release of 0.5%. The BoC core CPI, which excludes eight volatile items, grew at a faster pace of 0.6% than expectations and the prior reading of 0.2% on month-on-month. Annually, the underlying inflation data accelerated to 1.8% from 1.6% in April.

Meanwhile, the US Dollar Index (DXY) bounces back after correcting to near 105.40. The USD Index rebounded after Federal Reserve (Fed) Governor Michelle Bowman delivered hawkish guidance on interest rates. Fed Bowman said we are not at a point where rate cuts become appropriate. Bowman pushed back expectations of rate cuts to 2025 and warned of more hikes if disinflation appears to stall or reverse.

This week, the major trigger for the US Dollar will be the United States (US) core Personal Consumption Expenditure price index (PCE) for May, which will be published on Friday. The core PCE price index data is the Fed’s preferred inflation measure, which will provide fresh cues on when and how much the central bank will reduce interest rates this year.