USD/CAD Market Update

Current Level: Mid-1.40s, at fresh monthly lows after a soft US CPI print (24hr range 1.4055 to 1.4155)

USD/CAD trades in the mid-1.40s this morning, down from Monday's close near 1.4150, after softer than expected US inflation data triggered a broad selloff in the US dollar. The pair fell to a fresh monthly low of 1.4055 following the release before steadying near 1.4065, extending a multi-week decline. Attention now turns to tomorrow's Bank of Canada decision, with the June US inflation report, the week's marquee release, now behind the market.

Market Overview:

Risk appetite is firm this morning. Equities opened higher, supported by strong US bank earnings and the soft inflation data, while global bond yields are lower as markets price out near-term Federal Reserve tightening, according to CIBC. The US dollar is weaker against the entire G10 basket as the CPI miss spurs profit taking and repositioning out of the greenback. For USD/CAD, a broadly softer dollar has combined with firmer crude to push the pair to fresh monthly lows.

Soft US CPI Drives the Dollar Lower:

The dominant driver today is the June US consumer price report, which undershot expectations across the board. Headline CPI fell 0.4% on the month, its largest monthly decline since 2020, driven primarily by a sharp drop in gasoline prices, and brought the annual rate down to 3.5% from 4.2%. The larger surprise was core CPI, which was flat on the month against a 0.2% consensus and lowered the annual core rate to 2.6% from 2.9%. CIBC reports the softness was broad based, with slower shelter costs a major contributor. The print undercut the hawkish Federal Reserve pricing that had supported the dollar in recent weeks, triggering an immediate move lower in the greenback and bond yields.

Crude Firms on Renewed US-Iran Tensions:

Energy prices are higher, with WTI crude back toward US$80 per barrel after another wave of US airstrikes on Iran, according to CIBC. Crude had faded toward US$70 per barrel late last week as the earlier war premium cooled, so this marks a renewed bid. For the Canadian dollar, firmer oil restores some of the terms-of-trade support that had ebbed, reinforcing the move lower in USD/CAD. CIBC's strategists look for a deeper correction in the pair, arguing that any disruption to shipping through the Strait of Hormuz would ultimately support the Canadian dollar as higher oil prices outweigh the geopolitical risk. A reversal of the war premium, as has followed prior escalations this year, would remove that support.

Canadian Data/Outlook:

The domestic focus is tomorrow's Bank of Canada decision. Markets and CIBC look for no change at the July 15 meeting, leaving the policy rate at 2.25% for a sixth consecutive hold, with CIBC's Central Bank Watch showing implied odds of both a hike and a cut at 0%. CIBC expects a slightly hawkish tone, noting that growth and labour market data have shown signs of stabilising since the spring, though it cautions that ongoing trade uncertainty should keep the Bank from sounding overly confident, and its base case is that the next move higher does not come until 2027. The accompanying Monetary Policy Report and Governor's press conference will be scrutinised for the Bank's read on trade risk and the inflation outlook. Today's softer US inflation backdrop takes some external pressure off the Canadian dollar heading into the decision.

Fed Watch:

Today's soft inflation report reshaped Federal Reserve expectations. CIBC's Central Bank Watch now shows a 13% implied probability of a 25 basis point hike at the July 29 meeting, down from 35% on Monday, with no cut priced. CIBC's economists believe the report should bring some comfort to policymakers concerned about inflation and reinforces the case for a hold rather than a hike later this month. CIBC's own view is that the Fed is still likely to hold in July, but that today's data makes it harder to argue inflation is moving in the wrong direction. Fed Chair Warsh continues his congressional testimony today and tomorrow.

Technical Picture:

Resistance: 1.4100, the prior support shelf that now caps the pair, then 1.4155, today's high, with the 1.4175 to 1.4200 area beyond.
Support: 1.4000, the psychological level CIBC identifies as the next major layer, then 1.3981, the 38.2% Fibonacci retracement.
Outlook: Today's soft CPI drove USD/CAD through the 1.4100 and 1.4068 supports to a fresh monthly low at 1.4055, keeping the short-term bias firmly lower. CIBC's strategists continue to favour a deeper correction. A sustained break below the 1.4000 handle would expose 1.3981, while 1.4100 and today's 1.4155 high cap the near-term topside. Tomorrow's Bank of Canada decision is the next test of whether the pair extends toward 1.4000 or consolidates.

Week Ahead:

With today's US CPI now behind the market, tomorrow's Bank of Canada decision, Monetary Policy Report and press conference are the immediate focus, alongside US PPI. Canada's own CPI on July 20 and the European Central Bank decision on July 23 round out the next two weeks. The July 29 Federal Reserve meeting sits just beyond this window but remains the key event for dollar direction, and today's soft inflation print has materially lowered the market's implied odds of a hike there.

Other Notes:

• WTI crude is back toward US$80 per barrel after another wave of US airstrikes on Iran, per CIBC; firmer oil restores terms-of-trade support for the Canadian dollar, though a reversal of the war premium would remove it.
• Global bond yields are lower and equities opened higher, supported by strong US bank earnings and the soft inflation data, according to CIBC.
• CIBC, citing Citadel data, notes US retail investors have not recorded a single net-selling day in July, with average daily net buying running at more than three times normal levels, the strongest July for retail inflows in the dataset.