Euro Rises vs CAD as ECB Signals Hawkish Policy Shift

Key Moments

Euro Outperforms Despite Weak German Industrial Data

EUR/CAD held onto recent gains for a third straight session, hovering near 1.6040 during European trading on Friday. The cross remained supported as the Euro maintained its strength against major currencies, even after fresh signs of softness in Germany’s industrial sector.

Figures from Destatis released on Friday showed that Germany’s seasonally adjusted Industrial Output contracted 0.7% month-over-month in March. Markets had expected a 0.5% increase, following a revised 0.5% decline in February. On a year-over-year basis, Industrial Production in Germany dropped 2.8% in March, compared with a revised 0.2% decrease in February.

ECB Officials Maintain Hawkish Tone

Support for the Euro has been underpinned by firm messaging from European Central Bank policymakers. ECB Executive Board member Isabel Schnabel said on Thursday that the central bank could raise interest rates as early as next month, warning that households and businesses are beginning to respond in a troubling manner to sharply rising global energy prices.

Meanwhile, ECB board member Piero Cipollone stated on Wednesday that the likelihood of a rate hike has increased due to persistent inflation pressures, despite negotiated wage data indicating that pay demands have not yet accelerated.

Canadian Dollar Pressured by Softer Oil Prices

Further upside in EUR/CAD may be supported if the Canadian Dollar weakens alongside declining crude prices. The Canadian Dollar, which is closely tied to commodities, can be sensitive to moves in the energy market. Canada is the largest crude oil exporter to the United States.

West Texas Intermediate crude pulled back after modest gains in the prior session, trading near $92.60 per barrel at the time of writing. Oil prices retreated as a reduction in tensions between the United States and Iran eased worries about potential disruptions to supply.

Earlier, crude had risen when renewed frictions emerged between the US and Iran. The US military said it conducted retaliatory strikes on Iranian targets on Thursday, focusing on sites allegedly linked to attacks against US forces.

Bank of Canada: Policy Tools and Impact on CAD

The Bank of Canada (BoC), headquartered in Ottawa, is responsible for setting interest rates and conducting monetary policy in Canada. It meets eight times per year on a scheduled basis, with additional emergency meetings held when necessary. The BoC’s primary objective is to maintain price stability, defined as keeping inflation within a 1-3% range. Its main policy lever is the adjustment of interest rates. In general, relatively high interest rates tend to support a stronger Canadian Dollar, while lower rates tend to weaken it. The BoC also employs other instruments, including quantitative easing and quantitative tightening.

Quantitative Easing and Quantitative Tightening Explained

In extreme circumstances, the Bank of Canada can deploy Quantitative Easing (QE). Under QE, the BoC creates Canadian Dollars to purchase assets – typically government or corporate bonds – from financial institutions. This process usually puts downward pressure on the Canadian Dollar. QE is considered a last-resort measure when conventional interest-rate cuts are unlikely to be sufficient to achieve price stability. The Bank of Canada used QE during the Great Financial Crisis of 2009–11 when credit markets seized up after banks lost confidence in each other’s ability to repay debt.

Quantitative tightening (QT) is effectively the opposite of QE. It is used after QE has been implemented and when an economic recovery is taking hold and inflation is rising. During QE, the BoC buys government and corporate bonds from financial institutions to provide liquidity. Under QT, the central bank stops buying additional assets and ceases reinvesting principal payments from maturing bonds it already holds. QT is generally viewed as positive, or bullish, for the Canadian Dollar.