Inflation Surprise to the Downside Fuels Loonie Strength Amid Anticipated Policy Easing
The latest Canadian inflation data for August 2025 has given a new life to the currency markets, where the Consumer Price Index (CPI) showed a small increase in the main figures but a significant decrease in core measures. The report by Statistics Canada on September 16 comes just before the Bank of Canada's (BoC) most important decision on Wednesday, where a 25-basis-point cut to 2.50% is generally expected. This event signals the necessity to take into consideration the very thin line between holding on to certain price pressures and seeing the underlying trends cool, which are the factors that influence the change of monetary policy and the Canadian dollar's route.
Headline CPI went up to 1.9% year-over-year (YoY) from 1.7% in July, being very close to the forecasts of economists and also showing a slight surpassing of the BoC's 2.0% target. Comparing to the previous month, the prices rose by 0.1%, which mirrors the average consumer behavior in the last days of the summer. On the other hand, the most positive aspect was the core CPI, restraining the energy and food sectors, and the index was flat month-over-month after a 0.1% increase in July. Yearly core inflation rate was held at 2.6%, however, the BoC's preferred indicators―trimmed mean at 3.0% and median at 3.1%―showed the first signs of decline, letting go of the short-term wage and shelter cost pressure.
Before this data release, Governor Tiff Macklem indicated that situation of "core stickiness" was coming clearer when he said that core measures had stayed close to 3% over the summer, which was the reason for a pause in rate cuts after the July 30 meeting. The point in the data that is pulling the lever towards the side of easing is the analysts' interpretation of the surprise on the downside of the core as an indication that the BoC can bring about the loosening of policy without reigniting inflationary fears. Although the possibility of the U.S. imposing new tariffs under another administration is certainly one of the external risks, the April carbon tax exemption for gasoline in Canada has been a domestic factor that has prevented the energy sector from distorting the data.
****Market Reaction****
Markets swiftly responded to the release with initial volatility, but a bullish tilt for the loonie quickly took hold. The USD/CAD pair, which is the barometer of economic divergence between Canada and the U.S., dropped to two-week lows of about 1.3750 in the immediate aftermath. This move essentially went a long way in undoing most of the prior week's consolidation around 1.3850, which was largely driven by short-covering in USD amid bets on BoC divergence from a potentially hawkish Federal Reserve. Bond yields went down slightly with the 10-year Canadian benchmark fell 5 basis points to 3.12% reflecting a more than adequate cut pricing—now fully baked at 25 bps for September, with December odds rising to 70%.
Equity markets were quite strong as the TSX Composite managed to obtain a 0.3% increase, which was supported by the energy and materials sectors despite the lower oil prices. The commodity-linked CAD strength took most of the spotlight from the tariff jitters, though traders are still watching out for U.S. retail sales data later this week. Pablo Piovano, FXStreet Senior Analyst, referred to the reaction as "decisively bearish for USD/CAD," giving as a reason the pair breaking below the 50-day moving average and the Relative Strength Index (RSI) cooling to 55, which is a signal of lower movement potential if momentum continues.
****Canadian Dollar Price Today****
On the 16th of September, mid-morning trading saw the Canadian dollar performing well against most of its major counterparts, thus underlining the stabilizing influence of inflation. The USD/CAD exchange rate was 1.3757, down 0.14%, and showing a weekly decline of 1.2%—the loonie's largest drop since July. EUR/CAD went down to 1.6242 (+0.21% daily but off highs), and CAD/JPY rose to 110.45 with the safe-haven flows attracting the yen amid global equity wobbles.
The pricing in this case is a mixture of factors: on one hand, the CPI is quite balanced, then there is the BoC cut expectation and, finally, also a general weakness of the USD related to the U.S. election uncertainties. Daily averages of the Bank of Canada positioned the USD/CAD very close to 1.3765 late yesterday with intraday lows going down to 1.3730 support. The implied volatility has been mitigated to 8.2%, indicating traders that a post-BoC calm is expected; however, a hawkish Macklem tilt would limit the extent of the gains.
**What Do We Expect from the Canadian Inflation Rate
**
It was generally agreed before the release that the headline CPI of Canada for August would come out at 1.9% YoY. This was anticipated to be a slight increase from the previous month's figure of 1.7% which, however, was lower than expected due to some base effects in both transportation and recreation costs. The market was forecasting 2.6% YoY for core expectations, and the trimmed and median measures would remain near 3.0% as reported by RBC Economics in their preview. The reality was that the flat core print was higher than the expected monthly uptick of 0.2%, pointing to the disinflation trend in the services of travel and telecoms which the gain of shelter (up 5.2% YoY) has offset.
Inflation is expected to be stable around the 2.1% mark until the end of the fourth quarter of 2025, and thereafter it is predicted to decline to 1.8% in early 2026 when energy is normalized according to the BoC models. The risks are inclined to the upside coming from the U.S. trade policies, thus the prices of imports may rise by 0.3-0.5%. On the other hand, the pressure exerted on the target by productivity gains and labor market softening may end up accelerating the convergence. Analysts like those at Scotiabank also talk about data-dependency and are ready to admit that just one soft reading is not a trend—September's CPI will be very important to the December cut debate.
How Does It Affect USD/CAD
Oftentimes, the changes in CPI have great impact on the USD/CAD pair as inflation is one of the main factors determining the BoC-Fed policy gaps. The softer core of today's release has, however, widened the differential for easing, and therefore, the pair is seen moving down to 1.3720 support (a 2025 low from June) which is the closest next level of support. If it goes further below, then 1.3600 may be within the target, the 200-day SMA, from where the loonie rallies on carry trades would get even louder. Additionally, if the post-U.S. election scenario were to see tariffs going up, then imported inflation would probably firm up the CAD; however, in the near term, the bearish bias is dominant below 1.3924 resistance.
A number of technical indicators support this view as well: the Average Directional Index (ADX) at 18 is indicative of the power of the downtrend slowly coming into being, while the MACD crossovers go along with the force of the sellers. On the fundamental side, the U.S. CPI stood at 2.9% YoY in August, whereas Canada's path remaining below 2% makes it relatively more attractive thereby cutting the USD/CAD by 200-300 pips around the year-end if Bank of Canada rate cuts occur. Although, the fact that oil is trading below $70 a barrel for Brent puts a ceiling on the upside, given that energy exports represent 20% of the CAD valuation. Altogether, the BoC should be a period of choppy trading with bulls being able to target the parity if global growth declines.