Euro Gains vs Canadian Dollar Ahead of BoC Rate Decision

Key Moments

Euro Rebounds After Three-Day Slide

The Euro (EUR) recovered modestly against the Canadian Dollar (CAD) after three consecutive sessions of losses, with the EUR/CAD pair up 0.13% and trading close to 1.6078 during the European session on Wednesday. The cross had been under sustained pressure in recent days as rising oil prices followed renewed hostilities in the Middle East, a backdrop typically supportive for energy-linked currencies such as the CAD.

Canadian Dollar Performance vs Major Currencies

The Canadian Dollar’s performance across major peers showed notable weakness against the British Pound, making GBP the strongest counterpart to CAD on the day. CAD also underperformed against the Euro. A heat map of currency moves highlighted the percentage changes between key pairs, including USD, EUR, GBP, JPY, CAD, AUD, NZD, and CHF.

In the heat map, the base currency is taken from the left-hand column and the quote currency from the top row. For instance, when selecting the Canadian Dollar as the base currency on the left and moving horizontally to the US Dollar at the top, the value in that cell represents the percentage move in CAD (base)/USD (quote).

Oil Price Rally and Implications for CAD

West Texas Intermediate (WTI) crude has gained more than 17.5% over the past two weeks, trading close to $79.00. Currencies tied to economies that are net energy exporters, including Canada, typically benefit in periods of elevated oil prices, reflecting improved terms of trade and potential support for growth.

BoC Policy Announcement in Focus

Attention later in the day turns to the Bank of Canada’s monetary policy decision, scheduled for 13:45 GMT. Market expectations are centered on the BoC holding its benchmark interest rate at 2.25%. According to a Reuters report, easing underlying price pressures are seen giving policymakers limited incentive to tighten further, while a recovery in economic activity following a technical recession is viewed as reducing the need for additional stimulus.

Eurozone Outlook and ECB Policy Expectations

In the Eurozone, the renewed surge in energy prices driven by the war between the United States (US) and Iran has heightened concerns that the European Central Bank (ECB) may need to continue lifting interest rates this year. Analysts at MUFG anticipate that the ECB will implement another 25 basis points (bps) rate increase at its September meeting.

Recent remarks from several ECB officials have also underlined the risk that inflation could remain elevated due to conflicts in the Middle East. ECB Governing Council Member and President of the Deutsche Bundesbank, Joachim Nagel, said earlier this month, “I will keep options open for July and September decisions,” citing, “Inflation will stay at a high level this year.”

BoC Interest Rate Decision – Indicator Details

The Bank of Canada announces its policy rate at the conclusion of each of its eight scheduled meetings per year. When the BoC judges that inflation will run above its target (a hawkish stance), it raises interest rates in an effort to contain price pressures, which is typically supportive for the Canadian Dollar as higher yields attract foreign capital. Conversely, if the BoC expects inflation to fall below its target (a dovish stance), it cuts rates to support economic activity and push inflation higher, a move that generally weighs on CAD by reducing the appeal of Canadian assets to international investors.