USD/CAD trades cautiously below 1.4300 after hotter-than-expected Canadian inflation report

• USD/CAD struggles below 1.4300 as Canada’s CPI rose at a robust pace in February.
• Canadian CPI rose to 2.6% on year, the highest level seen since June 2024.
• The US Dollar rebounds as investors turn cautious ahead of the Fed’s policy meeting.

The USD/CAD pair struggles to hold the key support of 1.4270 in the North American session on Tuesday. The Loonie pair faces selling pressure after the release of the Canadian Consumer Price Index (CPI) report for February, which showed that price pressures accelerated at a faster-than-expected pace.

In the 12 months to February, the Canadian CPI rose at a faster pace of 2.6%, compared to estimates of 2.1% and the January reading of 1.9%. Month-on-month CPI grew at a robust pace of 1.1%, against expectations of 0.6% and the former reading of 0.1%. Significant acceleration in inflationary pressures indicates the aggressive monetary expansion stance adopted by the Bank of Canada (BoC) in the last few months is finally working.

BoC’s preferred core CPI – which excludes eight volatile items – accelerated at a strong pace to 2.7 on year from 2.1% in January. On a monthly basis, the underlying inflation data rose by 0.7%.

A fresh resurge in Canadian inflationary pressures could lead to a pause in the BoC’s aggressive policy-easing stance for some time. The BoC has reduced borrowing rates from 5% to 2.75% in the last nine months.

Meanwhile, the US Dollar (USD) attracts some bids as investors turn cautious ahead of the Federal Reserve’s (Fed) monetary policy decision on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds after discovering buying interest near the five-month low of 103.20.

The Fed is expected to leave interest rates unchanged in the range of 4.25%-4.50%. Therefore, market participants will pay close attention to the Fed’s dot plot and Summary of Economic Projections (SEP), which indicates interest rates, inflation, and the economic outlook.