Loonie Lifts on Hot Core Inflation, But BoC Cut Still in Play – Action Forex

Canadian Dollar firmed modestly in early US trading after inflation data showed a sharper-than-expected pickup in core price pressures. While headline CPI slowed to 1.7% in April, the drop was largely due to a steep decline in energy prices. In contrast, underlying inflation picked up pace, with core measures such as CPI-median, trim, and common all rising more than expected, driven in part by higher grocery and travel costs.

The market response was swift. Traders pared back expectations for a BoC rate cut at its June 4 meeting, with swaps now pricing in around a 48% chance, down from 65% prior to the release. Still, attention will now turn to Canada’s Q1 GDP report on May 30, which is likely to be the key data point in determining whether BoC will proceed with a cut or hold off amid resurging inflation pressures.

In the currency markets, Loonie is currently leading gains for the day, followed by Swiss Franc and Yen. Meanwhile, Aussie is the day’s worst performer, weighed down by RBA’s dovish rate cut and downgrade in inflation and growth projections. Kiwi is the second weakest, and then Sterling. Euro and Dollar are positioning in the middle.

Technically, however, USD/CAD is still bounded firmly inside range of 1.3898/4014. Further rise is still in favor and break of 1.4014 will resume the rebound from 1.3749 short term bottom to 1.4150 cluster resistance (38.2% retracement of 1.4791 to 1.3749 at 1.4147). However, firm break of 1.3898 will bring retest of 1.3749 low instead.

In Europe, at the time of writing, FTSE is up 0.72%. DAX is up 0.46%. CAC is up 0.71%. UK 10-year yield is up 0.039 at 4.704. Germany 10-year yield is up 0.013 at 2.606. Earlier in Asia, Nikkei rose 0.08%. Hong Kong HSI rose 1.49%. China Shanghai SSE rose 0.38%. Singapore Strait Times rose 0.16%. Japan 10-year JGB yield rose 0.035 to 1.523.

Canada’s headline CPI slows to 1.7% on energy, but core measures jump

Canada’s headline consumer inflation eased to 1.7% yoy in April, down from 2.3% yoy in March, slightly above the expected 1.6% yoy. The deceleration was primarily due to a steep drop in energy prices by -12.7% yoy, with gasoline down -18.1% yoy and natural gas falling -14.1% yoy. On a monthly basis, overall CPI declined by -0.1% mom.

However, the details beneath the surface were less comforting for policymakers. Excluding energy, inflation actually accelerated, with CPI rising 2.9% yoy compared to 2.5% yoy in March.

Moreover, all three core inflation measures rose notably. CPI-median rose from 2.9% yoy to 3.2%, above expectation of 2.9% yoy. CPI trimmed rose from 2.8% yoy to 3.1% yoy, above expectation of 2.8% yoy. CPI common jumped from 2.3% yoy to 2.5% yoy, above expectation of 2.3% yoy.

BoE’s Pill: Quarterly rate cuts may be too rapid given increasing intrinsic inflation persistence

BoE Chief Economist Huw Pill explained his vote to keep the Bank Rate unchanged at the May MPC meeting as a “skip” rather than a pause in the broader easing cycle.

In speech today, Pill said that while disinflation remains on track, the pace of quarterly 25bps cuts since last summer may be ” too rapid” given current inflation dynamics.

He expressed particular concern that structural changes in wage and price-setting behavior have heightened the “intrinsic persistence” of inflation in the UK.

As a result, Pill argued that a more cautious approach to monetary easing is warranted, reinforcing the need to slow the pace of rate reductions while continuing the broader policy normalization.

ECB’s Schnabel: Disinflation on track, steady hand needed amid new shocks

ECB Executive Board member Isabel Schnabel said the Eurozone’s disinflation process remains on track, but “new shocks” — particularly from trade tariffs — are presenting emerging risks.

While tariffs may dampen inflation in the short term, Schnabel warned they pose medium-term upside risks, warranting a “steady hand” in monetary policy.

She emphasized the importance of not overlooking “supply-side shocks” if they appear persistent, as doing so could risk “de-anchoring inflation expectations”.

Schnabel also highlighted the Eurozone’s relative resilience following the tariff escalation on April 2, noting Euro’s appreciation and a shift in perception toward the region as a “safe haven.” She characterized this as a “historical opportunity” to strengthen the international role of Euro.

ECB’s Knot: June rate cut possible, but not confirmed

Dutch ECB Governing Council member Klaas Knot said today that a rate cut at the June meeting remains on the table but is far from a done deal.

“I can’t exclude we will decide to have another rate cut in June, but I also can’t confirm it,” he told reporters, emphasizing that ECB must remain focused on medium- to long-term inflation risks rather than short-term fluctuations.

Knot said the new staff projections next month will incorporate scenarios reflecting the impact of recent US trade policies and potential EU countermeasures.

While the outlook may show lower inflation in 2025 and 2026, the bigger concern lies beyond that window, given the longer-term effects of tariff-related distortions. “It is more interesting to see what happens after that period,” he noted.

RBA cuts rates to 3.85%, lowers 2025 growth and inflation forecasts

RBA delivered a widely expected 25 bps rate cut, lowering the cash rate to 3.85%. In its statement, RBA said the risks to inflation had become “more balanced,” with headline inflation now within the target range and upside pressures “appear to have diminished” amid deteriorating global economic conditions.

Still, the central bank remains cautious, citing significant uncertainty around both demand and supply dynamics, as well as the evolving impact of global trade tensions and geopolitical developments.

The Board acknowledged a “severe downside scenario” and emphasized that monetary policy is “well placed” to respond decisively if global shocks materially affect Australia’s outlook. RBA flagged the unpredictability of global tariff policies and noted that households and businesses may hold back on spending amid heightened uncertainty. These concerns have contributed to a weaker outlook across growth, employment, and inflation.

In its revised forecasts, RBA downgraded GDP growth for 2025 to 1.9% (from 2.1%) and for 2026 to 2.2% (from 2.3%). End-2025 headline CPI was revised down to 3.0% from 3.7%, with end-2026 projection lifted from 2.8% to 2.9%. Trimmed mean forecasts for the end-2025 and end 2026 were both cut slightly from 2.7% to 2.6%.

RBA’s Bullock: Debated 25 vs 50bps cut debated; trade risks tilt toward disinflation

Following RBA’s decision, Governor Michele Bullock revealed in the post-meeting press conference that the Board briefly considered holding rates but quickly moved to debate between 25 and 50 basis point reductions.

Ultimately, the more measured 25bps cut was preferred, given that inflation is within target and unemployment remains resilient. Bullock emphasized that while easing was justified, “it doesn’t rule out that we might need to take action in the future.”

Bullock also noted that the Board views recent global trade developments as broadly “disinflationary” for Australia. However, she cautioned that risks remain tilted both ways.

“There is a risk to inflation on the upside, trade policies could lead to supply chain issues, which could raise prices for some imports, much as we saw during the pandemic,” she emphasized.

China cuts loan prime rates for first time in seven months

China’s central bank lowered its key lending benchmarks for the first time since October, delivering a long-anticipated move to support the economy.

PBoC lowered the one-year loan prime rate by 10 bps to 3.0%. The five-year LPR, a key reference for mortgages, was also trimmed by 10 bps to 3.5%.

The October 2025 easing was more aggressive at 25 basis points, but today’s cuts still mark a meaningful step in the ongoing monetary support cycle.

The move comes as part of a broader policy package unveiled by PBOC Governor Pan Gongsheng and top financial regulators ahead of high-level trade talks in Geneva that have since led to a temporary truce between China and the US on tariffs.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1180; (P) 1.1234; (R1) 1.1296; More…

Range trading continues in EUR/USD and intraday bias remains neutral. On the upside, decisive break of 1.1292 resistance should indicate that correction from 1.1572 has already completed after defending 38.2% retracement of 1.0176 to 1.1572 at 1.1039. Intraday bias will be turned back to the upside for retesting 1.1572 next. However, sustained break of 1.1039 will bring deeper decline to 61.8% retracement at 1.0709 next.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will now remain the favored case as long as 55 W EMA (now at 1.0818) holds.