USD/CAD tumbles from three-week high as sticky US inflation fails to lift the Greenback

• USD/CAD drops from its highest level since August 22 as the Greenback weakens post-CPI.
• US CPI rose more than expected, but steady core inflation keeps Fed cut bets intact.
• Traders now eye Canada's CPI on Tuesday ahead of the BoC decision on Wednesday.

The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Thursday, with USD/CAD retreating sharply after testing its highest level since August 22 earlier in the European session.

At the time of writing, the pair is trading near 1.3845, down from an intraday peak around 1.3892, as investors unwind long-USD positions following the latest batch of US inflation data.

The August Consumer Price Index (CPI) report revealed that headline inflation rose 0.4% MoM, slightly above the 0.3% forecast and accelerating from July's 0.2% increase. On a yearly basis, headline CPI held steady at 2.9%, in line with expectations but reflecting a modest uptick from the prior 2.7% reading.

Meanwhile, core CPI -- excluding food and energy -- rose 0.3% MoM and 3.1% YoY, matching consensus estimates. While the report confirmed that underlying inflation remains contained, the firmer headline print highlighted sticky price pressures in segments like shelter and energy.

Despite the upside surprise in headline CPI, markets responded with a mild risk-on tone. The US Dollar Index (DXY) softened alongside Treasury yields, as traders viewed the CPI data as insufficient to derail expectations for a rate cut at next week's FOMC meeting. According to the CME FedWatch Tool, markets continue to price in a 25 basis point cut on September 17 with a probability exceeding 90%, while also projecting two additional cuts by year-end.

Recent US macroeconomic data has further reinforced the case for near-term policy easing. Softer producer price inflation and signs of labour market weakness, alongside a downward revision in prior job gains, have underscored concerns about cooling economic momentum.

Attention now shifts to Canada's own inflation figures, due Tuesday, which are expected to play a pivotal role in shaping expectations for the Bank of Canada's (BoC) policy decision on Wednesday. The BoC is widely expected to cut rates by 25 basis points, as policymakers confront a weakening labour market and subdued domestic demand. Markets currently assign a roughly 70% probability to a BoC rate cut next week, and a soft CPI print could push expectations even higher.