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The Canadian Dollar rose as an initial reaction to the news that Canadian inflation unexpectedly rose in November, but digging into the data reveals trends remain consistent with an ongoing decline that will allow the Bank of Canada to cut interest rates in the first half of 2024.

The Canadian Dollar rose against the Dollar, Pound and Euro after Statistics Canada said CPI inflation rose 3.1% year-on-year in November - unchanged on October but ahead of expectations for a reading of 2.9%.

This was driven by a 0.1% month-on-month increase in inflation - also unchanged on the previous month - that defied expectations for -0.2%.

The Canadian Dollar had been under pressure over the preceding hours owing to comments from Bank of Canada Governor Tiff Macklem that 2024 would see interest rate cuts, and the initial reaction to the inflation figures allowed some relief for the currency.

The Pound to Canadian Dollar had been as high as 1.7052 but fell back to 1.7011. The Euro to Canadian Dollar had been as high as 1.4683 before retreating to 1.4646. The Dollar to Canadian Dollar rate fell from 1.3385 to 1.3360.

But Canadian Dollar strength will likely be limited as the report's details show little reason for the Bank of Canada to believe it won't be in a position to cut rates in a matter of months.

Drivers of inflation are becoming more narrowly based than they were earlier in the year, and the Bank of Canada's preferred core measures of CPI-trim and CPI-median continued to show softer trends than earlier in the year at 3.5% and 3.4% y/y, respectively. On a 3-month annualised basis, the core measures were softer, at 2.3% and 2.6%, respectively.

"While readings on a 3-month annualised basis are admittedly volatile, if such a trend were to persist for another few months, it should give the Bank of Canada comfort that headline inflation is on a path back to target, opening the door for interest rate cuts starting in Q2 next year despite the upside surprise in headline inflation today," says Andrew Grantham, an economist at CIBC Bank.