On August 20th, market analyst Sam Coventry wrote that after the latest data showed that Canadian inflation continued to cool down, the Canadian dollar fell against other currencies, increasing the possibility of further interest rate cuts by the Bank of Canada in the coming months.

Statistics Canada stated that the non quarterly adjusted CPI rate for July in Canada was 0.4%, higher than the expected 0.3%, but the annual non quarterly adjusted CPI rate for July in Canada decreased from 2.7% to 2.5%.

However, the market often reacts to core inflation indicators because these indicators have a greater impact on the decision-making process of the Bank of Canada.

The Bank of Canada will hold interest rate decisions on September 5th, October 24th, and December 5th.

According to Olivia Cross, a macro analyst at Capital Economics, these core inflation data indicate that the deflationary pressures in July have an encouraging broad basis. At present, the three-month annualized inflation rate is still 2.7%, lower than 2.9%. However, if the recent trend continues, the core inflation rate will be lower than the central bank's forecast of 2.5% for the third quarter CPI average and CPI median.

The reaction of the financial market indicates that these data may accelerate the easing process of the Bank of Canada, and in the coming months, it may cut interest rates by a magnitude greater than previously expected. This expected shift has put pressure on the Canadian dollar.

Cross said that these data open the door for the Bank of Canada to take greater measures later this year if labor market or economic activity data further weakens.

HSBC analyst Daragh Maher said that the decline of the Canadian dollar after inflation data may continue. He explained that the USD/CAD may bottom near the technical support of 1.36, a level that has rarely fallen below since mid April.

He also pointed out, "The decline of USD/CAD in August is not consistent with the relatively mild changes in the two-year yield spread, which has shown significant differences in the past week. Perhaps this divergence reflects the rebound of global stock markets and hopes for a soft landing in the United States, but it does indicate that the Canadian dollar is overvalued relative to interest rate expectations

Maher said, "The recovery of USD/CAD, coupled with the resilience of the pound against the US dollar, will continue the recovery of GBP/CAD, and our previous week's forecast target was likely to move to 1.7750

Daily chart of USD/CAD exchange rate