Canadian consumer prices rose 0.5% in July following a 0.2% decline in the previous month. The year-on-year increase held at 2.0% compared with consensus forecasts of a decline to 1.7%.

The core CPI rate also held at 2.0% and the Bank of Canada core rate was unchanged at 2.03%.

The Canadian dollar strengthened in light of the data with USD/CAD retreating to lows below 1.3260 before consolidation at near 1.3270.

The Bank of Canada will hold its next policy meeting on September 4th. With inflation as the key criterion, the central bank is likely to take a broadly neutral tone, although it will voice some concerns over the risk of a global downturn.

The bank will inevitably be cautious given that the ECB and Federal Reserve will hold policy meetings later in September, but the most dovish forecasts from investment banks are likely to be scaled back which will underpin the currency.

The Canadian dollar's trajectory will also be influenced strongly by trends in risk appetite. Waning fears over global recession would tend to underpin the domestic currency.

Trends in oil prices will set the tone for the loonie and will also be linked closely with trends in risk appetite. Crude has been undermined by the downgraded outlook of demand as global recession fears have increased.

API data recorded a larger-than-expected decline in crude inventories of 3.5 mln barrels. Crude sentiment will strengthen if the EIA data posts a substantial weekly contraction with WTI trading higher at about $56.80 p/b ahead of the inventories data.

The maket is likely to continue choppy trading in the short term with notable position adjustment ahead of Friday's speech by Fed Chair Powell, but with solid Canadian dollar support on dips.

Technically, USD/CAD will need to break trend line support around 1.3255 to generate sustained downward momentum.