EUR/CAD gathers strength above 1.6300 ahead of BoC rate decision
- EUR/CAD strengthens to near 1.6305 in Wednesday’s early European session.
- The BoC is widely expected to deliver a 25 bps rate cut on Wednesday.
- ECB policymakers see no reason to cut rates for now.
The EUR/CAD cross gathers strength to around 1.6305 during the early European session on Wednesday. The Canadian Dollar (CAD) edges higher against the Euro (EUR) as the Bank of Canada (BoC) is expected to resume interest-rate cuts later on Wednesday. On the Euro front, the European Central Bank (ECB) President Christine Lagarde is scheduled to speak.
The BoC has held its key rate at 2.75% steady for three consecutive meetings, despite trade tensions with the US and ongoing inflation concerns. The Canadian central bank is anticipated to lower its policy rate to 2.5% from 2.75% at the September meeting.
According to a Reuters poll last week, over 80% of economists expect the BoC to reduce interest rates by 25 basis points (bps), with many expecting at least one more cut before the end of the year. Traders will closely monitor the BoC Press Conference about how far the easing cycle will eventually extend. The dovish tone of the Canadian central bank could exert some selling pressure on the CAD and create a tailwind for the cross.
The ECB left interest rates unchanged at its September policy meeting last week. The central bank last cut rates in June, bringing rates further down from last year’s record high of 4.0%. Traders raise bets that the ECB is done cutting rates, which could underpin the shared currency in the near term.
ECB Governing Council members Martins Kazaks and Gediminas Simkus said on Tuesday that interest rates don’t need to be cut further right now, though neither of them ruled out an eventual move.
Euro FAQs
The Euro is the currency for the 19 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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