Canada's CPI is set to remain below target in June despite inflation uncertainty from US tariffs

• Canadian inflation is expected to tick higher in June.
• The headline Consumer Price Index is seen rising 1.9% YoY.
• The Canadian Dollar has embarked on a consolidative phase.

Statistics Canada will issue the Consumer Price Index (CPI) for June on Tuesday. This will attract the market's attention since it will provide the Bank of Canada (BoC) fresh information on how inflation is changing, which they use to set interest rates.

Economists anticipate that headline inflation will rise to 1.9% in June, above May's 1.7%. Inflation may have increased less than the 0.6% gain observed in May.

The BoC will also issue its core inflation measurements, which exclude food and energy costs. In May, these primary indicators were 2.5% higher than in the same month the previous year.

Even while there are indications that pricing pressure is reducing, analysts are still quite worried about the possibility of US tariffs causing domestic inflation to rise. Both markets and policymakers are anticipated to be circumspect in the coming weeks since the inflation forecast is now less clear.

What can we expect from Canada's inflation rate?

The Bank of Canada kept its benchmark rate at 2.75% in June, broadly in line with investors' expectations. Before thinking about any stimulus measures, the central bank wants to see how US tariffs affect the whole economy. Governor Tiff Macklem has expressed the possibility of additional reductions if trade issues worsen.

It was noted that the upside surprise in April's Canadian core CPI data was primarily attributed to categories that are not typically affected by tariffs, specifically domestic services. It was noted that a flare-up at the onset of tariffs establishes a poor starting point for inflation trends later this year.

During the press conference, Governor Macklem remarked on the challenges of interpreting tariff effects in the official CPI data and emphasised the dependency on soft data and insights from businesses that had already indicated rising costs.

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

On Tuesday at 12:30 GMT, Canada will release its April inflation figures. Markets are getting ready for inflationary pressure to resume.

If inflation is higher than expected, it could confirm the idea that price pressure from tariffs is starting to show up. This situation could lead the Bank of Canada to adopt a more cautious approach, potentially strengthening the Canadian Dollar (CAD) and increasing expectations for further rate cuts, which would exert additional pressure on the Loonie.

That being said, an unexpected rise in inflation isn't always positive news either. A sudden surge in inflation might make people worry about the Canadian economy's health, and strangely, this could also hurt the currency. In short, markets are paying careful attention--not only to the headline figure, but also to what it means for policy and growth in general.

FXStreet's senior analyst, Pablo Piovano, said that the Canadian Dollar seems to have embarked on a range-bound theme, motivating USD/CAD to hover around the 1.3700 neighbourhood in the last few days.

Piovano says that the occasional return of the selling bias might cause USD/CAD to go back to its 2025 bottom of 1.3538, which was set on June 16. After this level is broken, the next two levels might be the September 2024 low of 1.3418 (September 25) and the weekly low of 1.3358, reached on January 31, 2024.

He says that if bulls become more confident, they might push spot up to its temporary barrier at the 55-day Simple Moving Average (SMA) of 1.3725, then to the monthly ceiling of 1.3797 hit on June 23, and finally to the May top of 1.4015 set on May 13.

Looking at the bigger picture, Piovano expects the bearish trend to prevail below its important 200-day SMA at 1.4039.

He adds, "Also, the momentum indicators seem to be mixed: the Relative Strength Index (RSI) is just above the 50 threshold, and the Average Directional Index (ADX) is below 16, which means that the current trend is losing some of its strength."