Euro gains against Canadian Dollar despite ECB facing rate pause pressure
- EUR/CAD rises despite growing budget concerns in France could force the ECB to halt rate hikes after December.
- A Reuters poll expects the ECB to hold rates at 2.50% in October before hiking 25 basis points in December.
- The commodity-linked CAD may struggle amid falling crude prices as the US considers easing shadow fleet sanctions.
EUR/CAD halts its three-day losing streak, trading around 1.5930 during European hours on Thursday. However, the currency cross may further face challenges as the Euro (EUR) could weaken amid French debt concerns.
Citi analysts believe that growing fiscal risks in France could prompt the European Central Bank (ECB) to pause its interest rate hikes after December, or even sooner if financial stress begins to spread across the Eurozone.
A Reuters poll indicates that the ECB is expected to hold its deposit rate at 2.50% in October before delivering a 25 basis point rate hike in December, as inflation continues to run at nearly double the central bank's 2% target. However, ECB President Christine Lagarde noted that energy-driven inflation has not yet spilled over into the broader euro-area economy, reinforcing arguments for a more cautious approach to future monetary policy.
The EUR/CAD pair gained ground as the commodity-linked Canadian Dollar (CAD) may struggle amid falling oil prices. Crude prices declined following news that the Trump administration is considering easing sanctions on "shadow fleet" vessels that transport oil and petroleum products from sanctioned nations such as Russia, Iran, and Venezuela.
A US official confirmed Wednesday that the proposed shift is aimed at lowering record-high global freight rates. The policy discussions come shortly after President Donald Trump temporarily lifted sanctions on Russian diesel fuel, a decision that sparked sharp criticism from Ukrainian President Volodymyr Zelenskiy, European allies, and several Senate Republicans.
According to TD Securities, the latest Canadian employment data has triggered a sharp move in the rates market, with analysts noting that the release "sparked a considerable rally in CAD rates, with October now no longer priced in for a hike and 2s back below 3.20%." This shift underscores how quickly BoC tightening expectations have been pared back in response to softer domestic labour market signals.
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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