Canadian Dollar Strengthens After Fed Hold

The Canadian dollar strengthened to around 1.40 per USD from the two-week low of 1.42 on July 27th after the Federal Reserve held rates unchanged. The decision weakened the greenback as around one third of the market was positioned for a hike. Earlier this month, the BoC held its policy rate at 2.25% for a sixth straight meeting. The bank noted that the economy was adjusting to recent shocks and that energy-driven inflation pressures were easing, although some policymakers questioned the durability of the recovery and warned about rising inflation expectations. However, the decision preceded US President Trump’s threat of additional tariffs on Canadian imports and the latest escalation in US-Iran tensions.

The Canadian dollar was at 1.41 per USD, holding most of the pullback from the one-month low of 1.40 on July 17th after a soft PPI added to the disinflationary momentum in Canada. Canada's producer prices fell 1.4% month-over-month in June 2026, the sharpest decline since December 2023. Meanwhile, annual consumer inflation eased to 2.8% in June from 3.2% in May, slightly below forecasts of 2.9%. The Bank of Canada's preferred core inflation measures fell to their lowest levels in more than five years, reinforcing the BoC's view that higher energy costs stemming from the Middle East oil supply crisis are not spreading broadly through the economy. The softer inflation data reduced expectations of further Bank of Canada rate hikes this year, limiting the yield advantage that has supported the Canadian dollar.

The Canadian dollar weakened to around 1.41 per USD in July, pulling back from a near one-month high following the release of June's inflation report. Canada's annual inflation rate eased to 2.8% in June 2026 from 3.2% in May, slightly below forecasts of 2.9%. Gasoline prices increased at a slower pace, while the Bank of Canada's preferred core inflation measures fell to their lowest levels in more than five years, reinforcing the BoC's view that the impact of higher energy costs stemming from the Middle East oil supply crisis is not spreading broadly throughout the economy. The softer inflation data reduced expectations of further Bank of Canada interest rate hikes this year, lowering the relative yield that attracts foreign capital. At its latest meeting, the Bank of Canada kept its key policy rate unchanged at 2.25%, as widely expected.