Euro falls as higher Oil prices support Canadian Dollar amid mixed inflation data

• EUR/CAD declines on Monday as rising Oil prices support the Canadian currency.
• Canada’s headline inflation remains steady at 3% in August, in line with market expectations.
• The European Central Bank keeps uncertainty around the rate outlook following its latest hike.

EUR/CAD declines to around 1.6060 on Monday at the time of writing, down 0.17% on the day. The Canadian Dollar (CAD) benefits from the sharp rise in Oil prices, while the latest Canadian inflation data do little to alter the near-term monetary policy outlook.

Canada’s Consumer Price Index (CPI) rose 3% YoY in August, unchanged from July and in line with market expectations. On a monthly basis, however, CPI declined 0.1%, compared with expectations for a flat reading and following a 0.5% increase in July.

The Bank of Canada’s (BoC) core inflation measure rose 2.4% YoY, up from 2.3% previously. The central bank’s key measures of underlying inflation remain relatively contained, with Common CPI easing to 2.6% from 2.7%, while Trimmed CPI and Median CPI remained unchanged at 1.9% and 2%, respectively.

The mixed figures appear unlikely to significantly alter the BoC’s policy outlook after the central bank kept its policy rate unchanged at 2.25% at its latest meeting. The BoC recently noted that headline inflation has been hovering around 3%, mainly due to persistently higher gasoline prices, while indicating that there has so far been little evidence of these increases spreading to other components of inflation.

Canada inflation steadies as RBC sees BoC on hold until 2027

Economists at Royal Bank of Canada note that Canadian inflation “held at 3% year-over-year in August, unchanged from July,” with “underlying inflation pressures” described as having “remained comparatively contained.” RBC highlights that “there continued to be limited evidence that elevated energy costs were generating significant second-round inflation,” even as oil prices stay firm.

Looking ahead, the bank cautions that “the risk of greater pass-through will rise the longer oil prices remain elevated, making the breadth and persistence of underlying price pressures more important than month-to-month movements in headline inflation.” Overall, RBC judges that “the August report was broadly consistent with our base case that the Bank of Canada will hold interest rates through the remainder of 2026 before gradually raising rates in 2027 as the economy strengthens.”

The Canadian Dollar finds more direct support from another advance in Oil prices. West Texas Intermediate (WTI) trades near $100 and is up more than 15% so far this month as tensions in the Middle East keep concerns about global supply elevated.

Saudi Arabia has shut its East-West pipeline, which allows Oil flows to bypass the Strait of Hormuz, following a drone attack. According to the Associated Press, citing officials, the infrastructure is expected to remain mostly out of service for several weeks. Higher Oil prices tend to support the CAD given the importance of the energy sector to Canadian exports, contributing to the decline in EUR/CAD.

On the European side, the Euro (EUR) lacks fresh bullish catalysts after the European Central Bank (ECB) raised its key interest rates last week. However, the ECB provided little guidance regarding the future path of monetary policy.

ECB President Christine Lagarde said that discussions among Governing Council members focused on the decision taken at the meeting and that policymakers did not debate the future rate path, stressing that it is too early to anticipate the central bank’s next move.

Peter Kazimir, a member of the ECB Governing Council and Governor of the National Bank of Slovakia (NBS), nevertheless expressed concern on Monday about developments in gas and electricity prices. He said the ECB would consider all options at its next policy meeting and act if necessary, leaving the European monetary policy outlook open.