Canadian Dollar climbs to four-week high on soft US CPI, rising Oil prices

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The Canadian Dollar (CAD) strengthens sharply against the US Dollar (USD) on Tuesday, drawing support from softer-than-expected US inflation data and rising Oil prices amid escalating tensions in the Middle East.

USD/CAD falls to its lowest level since June 17 as softer US inflation data weighs on the Greenback.
Rising Oil prices provide additional support to the commodity-linked Loonie.
Traders await Wednesday’s Bank of Canada interest rate decision and US PPI data.

At the time of writing, USD/CAD trades around 1.4055, its lowest level since June 17, down nearly 0.70% on the day.

The US Dollar came under broad selling pressure after the latest Consumer Price Index (CPI) data showed inflation cooling more than expected. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 100.75, retreating from an intraday high of 101.32.

US CPI fell 0.4% MoM in June after rising 0.5% in May. Markets had expected a smaller decline of 0.1%. Annual inflation slowed sharply to 3.5% from 4.2%, below the 3.8% forecast.

Core CPI, which excludes volatile food and energy prices, was flat on a monthly basis, against expectations for a 0.2% increase. The annual core rate slowed to 2.6% from 2.9%, below the 2.8% forecast.

Traders quickly scaled back expectations of an imminent Federal Reserve (Fed) interest rate hike following the data. According to the CME FedWatch Tool, the probability of a July hike fell to 12% from 40% before the CPI release, while the odds of a September increase eased to 59% from 74%.

Canada is a major crude Oil exporter, and higher energy prices generally benefit the Canadian Dollar. West Texas Intermediate (WTI) trades around $78.00, up around 9% so far this week, as renewed hostilities between the US and Iran raise concerns over energy supplies through the Strait of Hormuz.

In a Truth Social post, US President Donald Trump said the Strait of Hormuz would remain open to all shipping except vessels travelling to and from Iranian ports. Trump also dropped the proposed 20% security fee, saying it would be replaced by trade and investment deals between Gulf states and the US.

Attention now turns to the Bank of Canada’s (BoC) monetary policy decision on Wednesday, with the central bank widely expected to leave its policy rate unchanged at 2.25%. In the US, traders await the Producer Price Index (PPI) data for more clues on inflation.

Economic Indicator

Producer Price Index (MoM)

The Producer Price Index released by the Bureau of Labor statistics, Department of Labor measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. Changes in the PPI are widely followed as an indicator of commodity inflation. Generally speaking, a high reading is seen as positive (or bullish) for the USD, whereas a low reading is seen as negative (or bearish).