Euro weakens against Canadian Dollar amid German political turmoil, higher oil prices
- EUR/CAD depreciates as the Canadian Dollar gains strength on higher oil prices amid market caution.
- President Trump may meet Iranian President Masoud Pezeshkian and Gulf leaders at the UN, while scheduling talks with President Xi.
- Euro faces pressure after Germany's far-right AfD state election victory leaves Chancellor Friedrich Merz's leadership increasingly vulnerable.
EUR/CAD depreciates after three days of gains, trading around 1.6080 during early European hours on Tuesday. The currency cross is losing ground as the commodity-linked Canadian Dollar (CAD) draws strength on higher oil prices, which could be attributed to the heightened market caution. Investors are keeping a close watch on potential US-Iran diplomatic developments at this week's United Nations General Assembly in New York, especially after increased energy supplies safely navigated through the Strait of Hormuz over the weekend.
Geopolitical attention is centered on US President Donald Trump, who is scheduled to address the UN General Assembly later in the day. His agenda includes a possible side meeting with Iranian President Masoud Pezeshkian, alongside planned talks with Chinese President Xi Jinping and leaders from other Gulf nations throughout the week. Adding to these diplomatic efforts, the Trump administration has proposed establishing a $5 billion fund to support the reconstruction of war-damaged infrastructure across the Middle East.
Meanwhile, the Euro (EUR) is coming under pressure against major currencies due to intensifying political instability in Germany. Following Sunday's state elections in northeastern Germany, the far-right Alternative for Germany (AfD) claimed first place, while Chancellor Friedrich Merz's conservative party suffered its worst regional defeat in post-war history, leaving his position increasingly precarious.
Euro eyes French spread widening as market caution builds
Analysts at ING point out that “the French 10-year spread over German bunds has hit the 100bp mark,” a development they say the FX market is still “treating…with caution.” However, ING warns that “risks of further spread widening remain,” and suggests that the Euro “may start to pay greater attention soon” if the move in French yields extends.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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