EUR/CAD falls toward 1.6250 as BoC caution boosts Canadian Dollar
- EUR/CAD struggles as the Canadian Dollar gains on a cautious tone surrounding the BoC policy outlook.
- The commodity-linked CAD may face renewed downward pressure amid softer crude oil prices.
- The Euro may find support as investors remain cautious about the ECB’s near-term monetary policy outlook.
EUR/CAD continues its losing streak for the third successive session after losing its daily gains, trading around 1.6260 during the European hours on Tuesday. The currency cross depreciates as the Canadian Dollar (CAD) gains on the cautious tone surrounding the Bank of Canada (BoC) policy stance.
Canada’s annual inflation cooled to 2.2% in October, but core measures monitored by the BoC stayed close to the 3% mark. Combined with firm labour data, unemployment at 6.9% and wage growth around 4%, underlying price pressures remain elevated, reinforcing the central bank’s cautious stance. Markets widely expect the BoC to keep interest rates unchanged through the end of 2026.
However, the commodity-linked Canadian Dollar (CAD) may struggle against its peers amid lower crude Oil prices. West Texas Intermediate (WTI) Oil price stalls its three-day rally, slipping to around $59.60 per barrel at the time of writing. Crude Oil prices softened amid renewed oversupply concerns after an ING report projected a significant market surplus lasting through 2026. Goldman Sachs also echoed this view on Monday, noting that a production surge could maintain a roughly 2 million-barrel-per-day surplus, likely weighing on Oil prices over the next two years.
The EUR/CAD cross may regain its ground as the Euro (EUR) could further receive support from the cautious sentiment surrounding the near-term European Central Bank’s (ECB) monetary policy outlook. The ECB is widely expected to keep rates unchanged, supported by stable economic performance and inflation near target.
European Central Bank (ECB) Governing Council Member Olli Rehn noted on Saturday, cautioning that the risk of slowing inflation should not be overlooked, though upside risks remain. Rehn emphasized the need for strong bank buffers and a vigilant policy stance. ECB policymaker Olaf Sleijpen said on Monday that the central bank could be forced to adjust monetary policy if a run on stablecoins were to send shockwaves through the economy.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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