Canadian Dollar falls as softer Canadian inflation weighs on the Loonie

• USD/CAD advances around 0.3% toward 1.4060 after rebounding sharply on the 4-hour chart.
• Canadian annual inflation slowed to 2.8%, reducing expectations of further Bank of Canada tightening.
• Investors await the US ADP Employment Change four-week average as the US-Iran conflict supports the Greenback.

USD/CAD trades higher near the 1.4060 area on Monday, recovering from below 1.4000 as the Canadian Dollar (CAD) weakens following softer-than-expected domestic inflation data. The US Dollar Index (DXY) also rises around 0.2% near 101.00, providing additional support to the pair.

Canada’s Consumer Price Index (CPI) declined 0.4% MoM in June, compared with expectations for a 0.2% fall and the previous 1.0% increase. Annual inflation slowed to 2.8% from 3.2%, slightly below the 2.9% market forecast.

Underlying price pressure also moderated. The Bank of Canada’s (BoC) Core CPI fell to 0.2% MoM from 0.6%, while the annual rate eased to 2.1% from 2.2%. The figures reinforced expectations that the BoC may not need to raise interest rates again, placing pressure on the Loonie.

The Canadian Dollar receives limited support from higher Crude Oil prices, with West Texas Intermediate (WTI) trading over 1% higher near $83.50 per barrel. Canada is a major Oil exporter, meaning stronger energy prices generally benefit the CAD, although Monday’s inflation-driven weakness is dominating the currency’s performance.

Meanwhile, the Greenback benefits from cautious market sentiment as the United States and Iran widen their attacks. Strikes affecting military targets, commercial shipping and water infrastructure have increased fears about Gulf shipping routes, regional energy supplies and access to drinking water. Further escalation could strengthen safe-haven demand for the US Dollar, although a sharper Oil rally may partially support the commodity-linked Canadian Dollar.

Looking ahead, investors will monitor the US ADP Employment Change four-week average. The previous reading stood at 19.75K. A further slowdown would suggest that US private-sector hiring is losing momentum and could limit USD/CAD’s advance, while a stronger figure may support Treasury yields and help the pair extend its recovery.

Short-term technical analysis:

On the 4-hour chart, USD/CAD trades at 1.4056, holding in a neutral-to-bearish configuration as it consolidates below the 100-period Simple Moving Average (SMA) at 1.4149. The Loonie's price remains marginally above the 20-period SMA at 1.4035, which offers nearby dynamic support, while the Relative Strength Index (RSI) around 51 suggests momentum has recovered from oversold territory but lacks a strong directional impulse, leaving the pair vulnerable while it trades under the broader bearish cap of the 100-period SMA.

On the topside, initial resistance appears at 1.4066, the nearest horizontal barrier, ahead of a stronger cap at the 100-period SMA clustered near 1.4149. On the downside, immediate support is seen at 1.4051, followed by a dense floor between the horizontal level at 1.4037 and the 20-period SMA at 1.4035, with a deeper cushion at 1.4029; a sustained break below this support band would likely reopen the lower side of the recent range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)