USD/CAD climbs above 1.3800 after mix Canadian Inflation data

• USD/CAD rises to 1.3820 as mixed Canadian inflation report keeps BoC rate cut hopes firm.
• BoC's preferred inflation gauge softens to 2.0% on a year-on-year basis.
• The US Dollar hovers near a six-month high as the Fed is expected to delay rate cut plans.

The USD/CAD pair jumps to 1.3820 in Tuesday's early New York session after Statistics Canada reported a mixed Consumer Price Index (CPI) report for March. The agency showed that monthly headline CPI grew by 0.6%, slower from expectations of 0.7% but higher than the prior reading of 0.3%. However, the annual headline inflation data accelerated to 2.9% from the prior reading of 2.8%.

The monthly Bank of Canada (BoC) CPI core data, which excludes eight volatile items, rose sharply by 0.5% compared to a meagre 0.1% growth in February. However, the annual core CPI slowed to 2% from the prior reading of 2.1%.

The return of the BoC's most preferred inflation measure to a desired rate of 2% is expected to allow the Bank of Canada (BoC) to start reducing interest rates, which are currently expected from the June policy meeting.

Last week, BoC Governor Tiff Macklem said a rate cut in June is possible if inflation continues to decelerate sustainably after the BoC keeps interest rates unchanged at 5%. The BoC has kept interest rates steady at 5% since July 2023 to maintain downward pressure on consumer price inflation.

Meanwhile, significant demand for safe-haven assets due to worsening geopolitical tensions and faded speculation for Federal Reserve (Fed) rate cuts for the June and July policy meetings have built pressure on the Canadian Dollar.

The US Dollar Index (DXY) falls slightly from a five-month high of 106.44. The near-term demand for the US Dollar remains intact as investors see the Fed keeping interest rates higher for a longer period. Inflation remaining higher than expectations for three months in a row suggests that there should be no urgency for rate cuts.