Canadian Dollar Outlook: CAD Faces CPI Test as US Tariff Deadline Nears

The Canadian Dollar starts the week facing two significant event risks: Canada’s July inflation report and the approaching deadline for new US tariffs on selected Canadian imports.

Traders are closely watching whether softer underlying inflation gives the Bank of Canada additional reason to maintain its current policy stance, while escalating trade friction with the United States creates a separate downside risk for the Canadian economy and the Loonie.

Canada CPI Is the Main CAD Event Today

Statistics Canada is scheduled to release the Consumer Price Index for July on Monday, August 17. The previous report showed headline inflation slowing to 2.8% year over year in June from 3.2% in May. CPI also fell 0.4% month over month in June, while inflation excluding gasoline remained at 2.2%.

Brown Brothers Harriman expects headline inflation to edge back up to around 2.9% year over year in July.

However, BBH sees underlying inflation remaining relatively contained. Its economists expect CPI excluding food and energy at around 1.8%, while the average of the Bank of Canada’s trimmed-mean and median measures is forecast near 1.85%.

If underlying inflation remains close to or below the Bank of Canada’s target, markets may become less confident that policymakers will need to raise interest rates again.

A stronger-than-expected inflation report could produce the opposite reaction and provide short-term support to the Canadian Dollar.

Bank of Canada Remains on Hold at 2.25%

The Bank of Canada kept its overnight policy rate unchanged at 2.25% on July 15, with the Bank Rate at 2.50% and deposit rate at 2.20%.

The central bank said Canada's economy is showing signs of improvement, but uncertainty remains elevated because of the Middle East conflict and US trade policy.

The BoC expects inflation to gradually return toward 2% in early 2027, provided elevated energy costs begin to ease. It also continues to see excess supply in the Canadian economy.

For the Canadian Dollar, contained inflation combined with moderate growth could limit expectations for higher Canadian interest rates.

The Bank of Canada’s next scheduled rate decision is September 2.

New 50% US Tariffs Loom on August 19

Trade policy presents another major risk for CAD.

The United States announced additional 50% tariffs on selected Canadian products, including goods ranging from wine and hockey sticks to cement. The measures were signed on July 20 and are scheduled to take effect after 30 days, putting the implementation date on August 19.

The measures do not apply to several important Canadian exports, including energy, potash, certain Section 232 products, fish and critical minerals.

Canadian officials are continuing negotiations with Washington ahead of the deadline. The Canadian government confirmed earlier this month that discussions were intensifying as both sides attempt to resolve outstanding trade disputes and seek relief from the planned Section 338 tariffs.

The tariffs cover nearly $20 billion in Canadian imports, according to BBH, making the trade dispute a potentially meaningful headwind for Canadian growth and business confidence.

Why Tariffs Could Pressure the Canadian Dollar

Higher US tariffs could reduce demand for affected Canadian exports and weigh on investment, employment and economic growth.

That creates an uncomfortable policy mix for the Bank of Canada.

Trade weakness could argue against higher interest rates, while tariffs and supply disruptions could simultaneously create inflationary pressure in some areas.

The BoC has already identified the Canada-US trade relationship as one of the largest risks to its economic outlook.

For CAD traders, this means the currency may become increasingly sensitive to headlines from Washington and Ottawa ahead of Wednesday’s deadline.

Canadian Dollar Outlook

The near-term Canadian Dollar outlook depends heavily on today’s CPI report.

Softer inflation could encourage markets to reduce expectations for future Bank of Canada tightening, potentially putting pressure on CAD and supporting USD/CAD.

Hotter inflation, particularly in the BoC’s preferred core measures, could revive expectations for higher rates and give the Canadian Dollar some support.

However, even a strong CPI report may not completely remove downside risks because the August 19 US tariff deadline remains unresolved.

BBH argues that contained core inflation combined with ongoing Canada-US trade friction leaves room for markets to price out some of the rate increases currently expected over the coming year. That scenario would generally represent a headwind for the Canadian Dollar.

For now, Canada’s inflation numbers and any progress in trade negotiations are likely to determine the next meaningful move in CAD pairs.