Euro remains stronger against Canadian Dollar following Eurozone Trade Balance data
- Euro holds ground despite the Eurozone trade balance swinging to a €7.8 billion deficit in May.
- Hawkish ECB comments supported the Euro, keeping rate hike expectations alive.
- The Canadian Dollar weakened as oil prices eased, despite rising supply concerns through the Strait of Hormuz.
EUR/CAD extends its gains for the second successive day, trading around 1.6100 during the European hours on Thursday. The currency cross remains stronger as the Euro (EUR) holds ground following the release of seasonally adjusted Eurozone Trade Balance data, which showed a deficit of €7.8 billion in May, swinging from the previous surplus of €1.3 billion.
The Austrian Central Bank Governor and ECB board member Marin Kocher said on Wednesday that he does not see second-round inflationary effects as of now, but that the bank is “ready to act” should that be necessary. At a later time, also on Wednesday, the Bundesbank President and also ECB member Joachim Nagel reiterated that, from the monetary policy perspective, it remains advisable to “act decisively” if needed.
The Euro finds support as hawkish ECB policymaker commentary offsets an unexpected contraction in May's Eurozone Industrial Production, keeping rate hike expectations alive for later this year. This resilience extended to the EUR/CAD cross, which gained traction as the commodity-linked Canadian Dollar weakened under the weight of falling crude prices.
Oil prices ease despite escalating US-Iran tensions and the growing risks to energy supplies moving through the vital Strait of Hormuz. Following a US strike on Iranian coastal defenses and missile sites on Wednesday, triggered by a newly reimposed naval blockade, Tehran warned it could halt regional energy exports, declaring that it is engaged in an "existential war" with the United States.
Euro FAQs
The Euro is the currency for the 20 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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