Euro drops against Canadian Dollar ahead of ECB policy decision
- Euro weakens ahead of the ECB’s rate decision while energy-driven inflation risks persist.
- ECB expected to hold its deposit rate at 2.50%, with traders seeking hints on possible December hikes.
- Bank of Canada raised rates by 25 bps to 2.50%, boosting CAD and signaling potential future tightening.
EUR/CAD continues its losing streak that began on October 16, trading around 1.5580 during European hours on Thursday. The currency cross depreciated as the Euro (EUR) lost ground ahead of the European Central Bank’s (ECB) upcoming policy decision.
The ECB is widely expected to hold its deposit rate unchanged at 2.50% at its Thursday meeting, following 50 basis points of rate increases earlier in the year. However, persistent energy-driven inflation has fueled ongoing debate over whether policymakers might resume rate hikes in December. As a result, market participants are closely scrutinizing the ECB’s evaluation of inflation risks, economic growth, and any forward guidance regarding the future path of interest rates.
Adding to the downward pressure on the EUR/CAD cross, the Canadian Dollar (CAD) strengthened after the Bank of Canada (BoC) delivered a 25 basis point rate hike, raising its benchmark overnight interest rate to 2.50% at its October meeting on Wednesday. BoC Governor Tiff Macklem indicated that further rate hikes may be needed, though policymakers intend to move cautiously given economic uncertainties. Supporting its hawkish stance, the BoC noted in its official statement that ongoing global economic resilience prompted a slight upward revision to 2026 global GDP growth to 3.1%, while maintaining its projections for 2027 and 2028 at 3.2%.
Analysts at Danske Bank highlight the limited market reaction to the Bank of Canada’s latest rate increase, noting that “USD/CAD and the 2Y swap rate were about unchanged on the news,” underscoring how the policy shift failed to materially move key Canadian FX and rates benchmarks.
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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