Euro gains against Canadian Dollar as ECB-BoC rate gap widens
- EUR/CAD rises as the BoC held rates at 2.25%, while the ECB hiked to 2.50%, weakening CAD support.
- Rising crude prices continue to boost Canadian inflation, offering partial support to the struggling CAD.
- Escalating Middle East tensions and ongoing US-Iran rhetoric keep forex markets on high alert for fresh catalysts.
EUR/CAD extends its gains for the third consecutive day, trading around 1.6110 during the European hours on Monday. The currency cross continues to appreciate as the Canadian Dollar (CAD) faces downward pressure, primarily driven by expectations of a widening interest rate gap between Canada and other major economies.
The policy divergent widened after the Bank of Canada (BoC) opted to hold its key policy rate steady at 2.25% during its September meeting. In contrast, both the US Federal Reserve (Fed) and the European Central Bank (ECB) raised their respective benchmark rates by 25 basis points, bringing the Fed funds target range to 3.75%–4.00% and the ECB deposit rate to 2.50%.
According to Reuters, financial markets are currently pricing in roughly a 45% chance of another 25 bps rate hike by the ECB in October, with a subsequent increase fully priced in no earlier than December.
However, HSBC analysts warn that the Euro “remains vulnerable to uncertainty over the European Central Bank’s appetite to raise rates,” especially in light of the Fed’s stance. They highlight that this vulnerability has been compounded “given the Federal Reserve’s more hawkish messaging at its September meeting,” underscoring a growing policy divergence that continues to weigh on EUR/USD sentiment.
Despite the headwinds from interest rate differentials, elevated oil prices are providing underlying support to the Canadian economy while keeping upward pressure on domestic inflation. Meanwhile, forex traders are searching for new market catalysts as they closely monitor escalating geopolitical developments in the Middle East.
Broad market sentiment remains heavily influenced by events in the region following US President Donald Trump’s rejection of Iran’s latest proposal to reopen the Strait of Hormuz. While President Trump stated that Tehran had overplayed its hand, he noted that negotiations are expected to resume shortly. Furthermore, he expressed confidence that the conflict with Iran will resolve soon, though he left open the possibility of additional military strikes prior to the upcoming US midterm elections.
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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