Canadian Inflation in Focus as Loonie Awaits CPI Clarity Amid Trade Turbulence

The spotlight turns to Canada this Tuesday as Statistics Canada unveils the April Consumer Price Index (CPI) — a release that could shape the Bank of Canada’s next policy move and determine whether the Canadian Dollar can break free from its recent consolidation phase.

Headline inflation is expected to slow significantly, with year-over-year CPI forecast to rise just 1.6%, down sharply from March’s 2.3% increase. On a monthly basis, however, inflation is projected to climb 0.5%, up from the prior 0.3%. The Bank of Canada’s preferred core measures, which filter out volatile price movements, will also be closely watched for signs of underlying strength or weakness.

This anticipated deceleration reflects recent trends, but markets remain cautious. The figures don’t yet capture the full brunt of U.S. tariffs recently introduced by President Donald Trump’s administration — a policy shift that has injected significant uncertainty into the inflation and growth outlook for Canada.

The BoC, which left interest rates unchanged at 2.75% last month after seven consecutive cuts, flagged the unpredictability of U.S. trade actions as a key reason for pausing its economic forecasts. In its place, policymakers offered two potential scenarios: a best-case view where tariffs are rolled back and inflation dips temporarily, and a worst-case projection featuring a protracted global trade war that pushes Canadian inflation above 3% by mid-2026.

The central bank’s annual Financial Stability Report echoed those concerns, warning that continued tariff battles could weaken the financial system by pressuring household and corporate debt management. While banks remain resilient for now, the BoC highlighted that further trade tension could trigger market volatility and strain liquidity — or even lead to systemic instability in more severe scenarios.

As investors brace for Tuesday’s CPI data at 12:30 GMT, analysts note that the USD/CAD pair has entered a consolidation pattern just below its 200-day Simple Moving Average (SMA) at 1.4012. According to FXStreet’s Pablo Piovano, if the Canadian Dollar breaks through this level, it could open the door to further gains, with resistance levels seen at 1.4098, 1.4414, and the February high of 1.4792.

However, failure to clear these technical levels could invite renewed selling pressure, with potential downside targets at 1.3838 and 1.3817 — the April and November lows — and possibly as far as 1.3418 if bearish momentum resumes.

The market’s response to the inflation data will also hinge on how it shapes expectations for future BoC action. A stronger-than-expected print may prompt a more hawkish stance, bolstering the Canadian Dollar. Conversely, a weaker reading would reinforce the case for more rate cuts, weighing on the Loonie. Yet an upside surprise could just as easily spark fears of stagflation if it reflects tariff-driven price increases rather than real economic strength.

As global investors weigh the fallout from Moody’s downgrade of the U.S. sovereign credit rating and a fragile geopolitical backdrop, Canadian inflation data could prove pivotal in charting near-term direction for both monetary policy and the CAD. With technical indicators signaling a pause in trend and fundamental risks still lurking, the Loonie faces a key test ahead.