USD/CAD Exchange Rate Stuck in Range as Canada Inflation Surprises to the Upside

The USD/CAD exchange rate has been stuck in a narrow range near 1.3870, unable to break free from its equilibrium. The Canadian dollar is receiving support from dual positive factors: higher-than-expected inflation data and robust oil prices.

Canadian inflation data released on August 17 exceeded market expectations, with the overall Consumer Price Index (CPI) rising 0.5% month-on-month in July. The annual rate increased to 3.0%, surpassing the forecast of 2.9%. The Bank of Canada's core CPI accelerated to 2.3% year-on-year from 2.1%, with a month-on-month reading of 0.2% from 0.1%

The resurgence of inflationary pressures has provided fundamental support for the Canadian dollar, while stronger oil prices have also contributed to its strength. However, safe-haven demand driven by geopolitical risks has underpinned the U.S. dollar, limiting its downside against the Canadian dollar.

Former U.S. President Trump's statements on the Strait of Hormuz and his intention to end the memorandum of understanding with Iran have kept geopolitical risk premiums elevated. Investors are concerned that volatile energy prices could reignite inflationary pressures, forcing the Federal Reserve to adopt a more hawkish monetary policy stance.