Euro weakens against Canadian Dollar amid higher oil prices

• Strong Canadian oil gains are putting temporary pressure on the EUR/CAD cross.
• US Treasury bond buybacks and rising European gas prices are fueling Euro support.
• Accelerating German inflation increases expectations for further European Central Bank rate hikes.

EUR/CAD halts its three-day winning streak, trading around 1.6110 during the European hours on Thursday. The currency cross faces downward pressure as the commodity-linked Canadian Dollar (CAD) gains support from rising crude oil prices.

Escalating tensions in the Middle East, combined with stalled negotiations between the United States (US) and Iran, have driven the crude market surge. While the confrontation has spread to the critical Strait of Hormuz waterway, US President Donald Trump noted that oil shipments continue to move through the passage, leaving open the possibility of future talks with Tehran.

Despite CAD's current edge, the EUR/CAD cross could regain ground as the Euro (EUR) receives support following new policy shifts from the US Treasury. By doubling its buyback limits for long-term notes and bonds in the upcoming financial quarter, the Treasury is expected to inject significant dollar liquidity into the market via its General Account, putting downward pressure on the US Dollar (USD) and benefiting rival currencies like the Euro (EUR).

Eurozone inflows build as foreigners ramp up demand for local assets

Analysts at ING point out that the underlying flow picture for the Eurozone remains supportive, noting that “behind the scenes, foreigners are also buying a lot of eurozone debt and equities.” They highlight ECB data released yesterday showing that foreign investors “have bought around €1.1tr of eurozone securities over the last 12 months,” underscoring robust external demand for Eurozone assets and reinforcing the broader Euro diversification narrative.

Additionally, European economic fundamentals are providing underlying strength for the Euro. Soaring European natural gas prices, caused by Middle Eastern supply shortages, are keeping inflationary risks high, which will likely compel the European Central Bank (ECB) to deliver further interest rate hikes this year.

Germany's July producer prices surged 3.0% year-on-year. This accelerated growth blew past market expectations of 2.7% to mark the fastest annual increase since April 2023, while monthly prices rebounded sharply by 1.1%, signaling persistent underlying price pressures across the Eurozone.

German producer prices surprise but market impact seen as limited

Economists at UBS highlight that the latest German producer price data "were higher than consensus," but they downplay the broader significance of the release, noting that "very few economists bother to forecast this data." This framing suggests the upside surprise is unlikely to materially shift market narratives, with the series viewed more as a secondary indicator than a key driver of investor positioning.