CAD Weakens as Inflation Supports Dovish BoC Outlook

The Canadian dollar weakened to 1.38 per USD in May as softer core inflation data reinforced expectations that the Bank of Canada may continue looking through the impact of higher energy prices. While headline inflation accelerated to 2.8% in April due to rising gasoline costs linked to the Middle East conflict, the Bank of Canada’s preferred core inflation gauges slowed more than expected to their lowest levels in five years, signaling easing underlying price pressures outside the energy sector. The data aligned with recent central bank guidance that energy-driven inflation may prove temporary and reduced expectations of rate hikes. Conversely, robust labor data and higher core inflation in the US raised expectations of a rate hike by the Federal Reserve this year, supporting the US dollar.

The Canadian dollar weakened slightly to 1.37 per USD, extending its retreat from the seven-week high of 1.358 reached on April 30, as persistent inflation concerns and rising US Treasury yields supported the greenback following hotter-than-expected US inflation data. The latest US CPI report showed headline inflation accelerating to 3.8%, reinforcing expectations that the Federal Reserve may keep interest rates elevated for longer as price pressures broaden across the economy. Additional support for the US dollar came from ongoing geopolitical uncertainty in the Middle East, as limited progress in negotiations involving Iran kept fears alive that disruptions around the Strait of Hormuz could persist. Meanwhile, elevated oil prices continued to limit broader downside pressure on the commodity-linked Canadian dollar.

The Canadian Dollar touched 1.37 against the USD, the lowest since April 2026. Over the past 4 weeks, US Dollar Canadian Dollar lost 0.12%, and in the last 12 months, it decreased 1.68%.