Euro drops against Canadian Dollar amid energy shocks, growing Fed rate hike pressures
- EUR/CAD weakens as the Euro struggles amid rising risk aversion, escalating Middle East conflicts, and soaring oil prices.
- The Canadian Dollar benefits heavily from elevated energy prices, compounded by ongoing logistical bottlenecks that bypass the Strait of Hormuz.
- Hotter-than-expected US consumer inflation data drove market pricing for an upcoming Federal Reserve rate hike to 87%.
EUR/CAD depreciates further after paring its recent gains from the previous day, trading around 1.6030 during European hours on Monday. The currency cross is currently dropping as the Euro (EUR) faces mounting challenges from increasing risk aversion, rising oil prices, and growing Federal Reserve (Fed) rate hike bets.
Traders are adopting a cautious stance amid fears of a protracted Middle East crisis, which has kept oil prices elevated and delivered an inflationary shock to the global economy. This cautious sentiment is further compounded by recent data from the US Bureau of Labor Statistics, which reported that the US Consumer Price Index (CPI) rose 0.4% month-on-month in August, pushing the 12-month increase to 3.4%. Meanwhile, core CPI increased by 0.3% monthly, outpacing both prior and forecasted 0.2% gains.
US inflation report has intensified pressure on the Federal Reserve to tighten monetary policy further, with the CME FedWatch tool indicating that financial markets have priced in an 87% probability of a quarter-point rate hike at the next meeting, up sharply from 59% the previous week.
European Central Bank (ECB) Governing Council member Gediminas Simkus stated on Monday that the possibility of monetary policy actions at every upcoming meeting cannot be ruled out. Simkus emphasized the need to closely evaluate energy prices ahead of the October policy meeting. Furthermore, he noted that December will serve as a natural timeframe to more thoroughly assess the economic situation.
Moreover, the EUR/CAD cross is also under pressure because the commodity-linked Canadian Dollar (CAD) is receiving strong support from elevated oil prices. Crude oil prices have surged toward nearly four-month highs following a drone attack that forced Saudi Arabia to shut down a major crude pipeline, a critical route traditionally used to bypass the Strait of Hormuz. Operations on the East-West pipeline were suspended immediately as a precautionary measure following Thursday's attacks, and officials have not yet indicated when normal operations will resume.
Canada inflation data set to test BoC’s hawkish warning
Brown Brothers Harriman’s Elias Haddad highlights that Canada’s August CPI release on Monday will be a key gauge of the Bank of Canada’s recent shift in tone, noting that it will “test the Bank of Canada’s (BoC) warning that ‘the upside risks to inflation have increased.’” With headline and core measures expected to hover around or slightly above the 2% mark, the data will help clarify whether those upside risks are materializing and how firmly the BoC’s hawkish bias is likely to be reinforced.
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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