On the one hand, Governor Tiff Macklem stated that the existing risks are two-sided (an economic slowdown amid rising inflation), and the central bank is trying to maintain a fragile balance under the circumstances. On the other hand, he outlined the bank's priorities, making it clear that, in the conflict between price stability and supporting economic activity, the central bank would be prepared to "sacrifice" growth rates to contain inflation.

In other words, it's about "putting out the inflation fire" first, then raising GDP.

The main trigger for the tightening rhetoric was high oil prices driven by the ongoing conflict in the Middle East. At the time of the meeting, the price of crude oil was approximately $10 higher than what the Bank of Canada assumed in its spring forecasts. Overall inflation jumped to 2.8% in April, mainly due to rising gasoline prices.

This situation was reflected in the tone of the accompanying statement. In particular, a fairly strong formulation appeared in the text stating that the Governing Council would not allow high energy prices to lead to sustained inflation. Commenting on this wording, Macklem noted that if businesses begin to widely pass their costs onto consumers, the Bank of Canada will "have to respond with tightening monetary policy parameters."

It is important to note that, according to the latest data on Canada's CPI growth, there are no clear signs of a massive transfer of the energy shock into core inflation as of yet. However, the central bank is already acknowledging the risk of such a scenario, taking a preemptively hawkish stance and signaling readiness to tighten policy if secondary inflation effects become more pronounced.

Following the June meeting, swap markets began pricing in the possibility of an interest rate hike this year. This is the first time (since last fall) that market expectations have turned upward, and the likelihood of a rate cut has dropped to nearly zero.

One could assume that if the Canadian economy were not in a technical recession, the central bank might have raised rates at yesterday's meeting. However, the central bank is forced to adopt a wait-and-see position, first due to said recession. Let me remind you that after revising the data on Canada's GDP growth for the fourth quarter of 2025, the statistical office reported a 1.0% contraction in the economy. In the first quarter of this year, the country's GDP also declined by 0.1%.

The second issue is trade uncertainty. Risks posed by new tariffs and the upcoming "revision" of trade agreements are exerting pressure on Canada's investment climate. This primarily pertains to the USMCA agreement. Under its terms, the parties are required to conduct a formal review of the agreement's operation every six years, with the first such review due by July 1 of this year. Canada has officially notified the US and Mexico that it seeks to extend the deal without any preconditions. However, the United States demands revisions to several important points of the agreement for Canada. In particular, the White House insists on changing the rules for duty-free importation of vehicles—Washington wants to enforce a requirement that at least 50% of vehicle components be produced on American soil (which is unacceptable to Canada's automotive industry).

Thus, the "June pause" is absolutely justified and well-reasoned. At the same time, unexpectedly firmer statements from the central bank have provided temporary support for the Canadian dollar.

However, after a short-term price pullback to the 38 level, the pair reversed higher and is now approaching the 40 level. This price dynamic is driven exclusively by the geopolitical agenda. Following Trump's announcement of "new powerful attacks on Iran," the safe-haven greenback has seen increased demand, including against the Canadian dollar.

The next direction of USD/CAD will depend entirely on developments in the Middle Eastern conflict. If the escalation intensifies (for example, if a second wave of announced airstrikes follows), the US dollar will see higher demand as a safe asset, further contributing to the rise of the pair toward resistance levels of 1.4050 (the upper Bollinger Bands line on W1) and 1.4100 (the Kijun-sen line on MN). If the parties indeed return to the negotiating table, the loonie is likely to return to the 1.3910–1.3970 range (the lower and upper Bollinger Band lines on the four-hour chart).