Canada CPI set to ease in April amid inflation uncertainty from US tariffs

• The Canadian inflation is expected to have lost further momentum in April.
• The headline Consumer Price Index is seen rising 1.6% from a year earlier.
• The Canadian Dollar seems to have moved into a consolidative phase.

All eyes will be on Statistics Canada this Tuesday as it releases the April Consumer Price Index (CPI), a key inflation gauge that the Bank of Canada (BoC) closely tracks when setting interest rates.

Headline inflation is expected to have eased sharply, with annual CPI forecast to fall 1.6% from 2.3% in March. On a monthly basis, however, inflation is projected to have picked up slightly, rising 0.5% versus the previous 0.3% increase.

The Bank of Canada will also release its preferred core inflation measures, which aim to strip out volatile price swings for a clearer view of underlying trends. In March, the BoC's core CPI CPI rose 2.2% from a year earlier.

While recent inflation data suggests price pressures are moderating, markets are expected to tread carefully. The figures do not yet reflect the full impact of US trade tariffs recently imposed under the Trump administration--an element that could complicate the inflation outlook in the months ahead. As a result, a cautious tone is likely to prevail among investors and policymakers alike.

What can we expect from Canada's inflation rate?

The BoC held its benchmark interest rate at 2.75% last month, pausing after seven consecutive cuts and citing mounting uncertainty surrounding US trade policy as a key reason for withholding its usual economic forecasts.

Officials said the unpredictability of US-imposed tariffs and the potential for a broader global trade conflict made it impossible to provide a reliable outlook. Instead of its regular quarterly projections, the bank released two hypothetical scenarios to illustrate possible outcomes:

In the more optimistic scenario, most tariffs are eventually rolled back through negotiation. The Bank said this would likely result in a temporary slowdown in Canadian and global growth, with inflation dipping to 1.5% for a year before returning to the 2% target.

A more severe scenario envisions a prolonged global trade war. In that case, Canada would enter a deep recession, and inflation would surge past 3% by mid-2026 before gradually easing back to target levels. The bank acknowledged that other outcomes were possible, underscoring the high degree of economic uncertainty.

In its annual Financial Stability Report (FSR), the central bank acknowledged that the system remains resilient for now, but it also flagged rising vulnerabilities if trade tensions drag on.

Officials pointed to the tariffs imposed by US President Donald Trump on Canadian goods and Ottawa's retaliatory measures as potential threats. They said that while the financial sector is currently holding up well, ongoing tariff battles could eventually hurt banks and financial institutions by making it harder for households and businesses to manage their debt.

The BoC noted that, in the short term, the unpredictability of US trade policy could trigger more market volatility and strain liquidity. In more extreme cases, that kind of turbulence could escalate into broader market dysfunction.

Over the medium to long term, the bank said, a full-blown global trade war could have severe economic consequences.

When is the Canada CPI data due and how could it affect USD/CAD?

Canada's April inflation data is due out on Tuesday at 12:30 GMT, and markets are bracing for a mixed picture. While there's a general sense that price pressures may have eased somewhat, the details could go either way.

If inflation comes in hotter than expected, it might prompt the BoC to take a more hawkish stance, which could give the Canadian Dollar a boost. On the flip side, softer numbers would likely reinforce expectations for more rate cuts, putting some pressure on the Loonie.

That said, a sharp jump in inflation isn't necessarily good news either. It could raise red flags about the health of the Canadian economy, and ironically, that kind of surprise might end up weighing on the currency too. In short, markets are watching closely--not just for the headline number, but for the broader message it sends about where policy and growth are headed.

Senior Analyst Pablo Piovano from FXStreet pointed out that USD/CAD has moved into a consolidative range just below its critical 200-day Simple Moving Average (SMA) at 1.4012.

"If the Canadian dollar manages to clear its 200-day SMA, the near-term outlook should shift to a more constructive one, allowing at the same time for the recovery to gather pace. That said, the 55-day SMA at 1.4098 should offer interim resistance prior to the April high of 1.4414, set on April 1, with a further barrier at the March peak of 1.4542. A breakout above that level could bring the 2025 high of 1.4792, posted on February 3, back into view," he added.

The resurgence of the bearish tone could motivate USD/CAD to embark on a potential visit to its 2025 floor at 1.3838, marked on April 11," Piovano said. "That would be followed by the November 2024 low at 1.3817, with the next key support seen at the September 2024 trough of 1.3418."

From a technical standpoint, Piovano flagged that USD/CAD is currently signalling some sidelined mood based on the Relative Strength Index (RSI) around the 50 threshold. He added that the Average Directional Index (ADX) is easing toward 24 points to some loss of impetus of the current trend.