Jun 27, 2023

The EURCAD exchange rate has a big day of data ahead on Tuesday, with a speech from the ECB President coming ahead of Canadian inflation figures.

EURCAD: Weekly Chart

EURCAD: Weekly Chart

A recent pullback in the euro has seen the Canadian dollar push for the 1.4235 support level. The week’s data could see a breakout to lower levels.

Analysts are expecting another decline in Canada’s inflation rate, with a drop from highs of 6.2% a year ago falling to 4.1% recently. Economists now expect a drop in core inflation to 3.9%. In April, the CPI was 4.4% higher than the previous year, marking the first increase in the rate of headline inflation since June 2022.

For the official inflation figures, a steep drop of 1% is expected, with the rate expected to hit 3.4% in May. That could see the Bank of Canada hold off on any further interest rates in the meantime.

“May’s CPI report, out Tuesday, should look encouraging on the surface, with a big deceleration in headline annual inflation, due in no small part to base effects (prices were up big in May 2022),” said Benjamin Reitzes, strategist at BMO Capital Markets.

“However, the picture on the core metrics is expected to be much less favourable, supporting the case for further BoC tightening.”

Earlier this month, the Bank of Canada surprised investors with another hike in its lending rate to 4.75%, the highest since 2001.

Leslie Presto, a senior economist at TD Bank, said the release of inflation data this week will be a key factor for the central bank. Presto said core inflation “had not eased as much as the Bank of Canada had hoped in recent months”. 

“If inflation cools far more than we expect, our confidence that the BoC is likely to hike again will be reduced,” she said.

Economists at the Royal Bank of Canada expect lower inflation in May but said “substantial downside surprises” would be needed by the BoC.

“We look for ‘headline’ price growth to slow—falling to 3.6% annually from 4.4% in April,” RBC economists said.

“Lower energy prices explain most of that slowdown. And food price inflation is expected to edge lower again after peaking in January.”

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