The Canadian dollar weakened beyond 1.378 per USD in late May after soft economic data reinforced expectations of a more dovish Bank of Canada. The economy unexpectedly contracted in the first quarter of 2026 from a year earlier, marking a second consecutive annual decline and underscoring a loss of domestic momentum.
The figures bolstered expectations that the BoC will leave interest rates unchanged, with markets widely anticipating a hold at the June 10 meeting. At the same time, the Bank of Canada’s preferred core inflation gauges slowed more than expected to their lowest levels in five years, pointing to easing underlying price pressures outside the energy sector.
Together, the data reinforced the central bank’s view that energy-driven inflation is likely to be temporary and further diminished the odds of additional rate hikes, putting additional pressure on the loonie.
