Euro Rises Against CAD as ECB and BoC Policy Paths Diverge

Key Moments

EUR/CAD climbed for a third straight session, trading near 1.6110 during European hours on Monday.
The Bank of Canada kept its key rate at 2.25% while the ECB lifted its deposit rate to 2.50%, widening the policy gap.
Rising crude prices and heightened Middle East tensions are shaping sentiment toward the Canadian Dollar and broader FX markets.

EUR/CAD Supported by Growing Policy Divergence

EUR/CAD extended its upward move for a third consecutive session, changing hands around 1.6110 during European trading on Monday. The cross has been buoyed by sustained weakness in the Canadian Dollar (CAD), as investors increasingly focus on a widening interest rate differential between Canada and other major economies.

The divergence in monetary policy became more pronounced after the Bank of Canada (BoC) decided at its September meeting to maintain its key policy rate at 2.25%. In comparison, both the US Federal Reserve (Fed) and the European Central Bank (ECB) raised rates by 25 basis points, pushing the Fed funds target range to 3.75%-4.00% and the ECB deposit facility to 2.50%.

Central Bank	Latest Decision	Resulting Policy Rate
Bank of Canada (BoC)	Held rates	2.25%
European Central Bank (ECB)	Raised by 25 bps	2.50% (deposit rate)
US Federal Reserve (Fed)	Raised by 25 bps	3.75%-4.00% (target range)

Citing Reuters, the article notes that markets are assigning roughly a 45% probability to another 25 basis point hike by the ECB in October, with the next fully priced increase not expected before December.

Analyst Views on the Euro and Fed-ECB Dynamics

HSBC analysts caution that the Euro “remains vulnerable to uncertainty over the European Central Bank’s appetite to raise rates,” particularly when set against the Fed’s latest signals. They emphasize that this vulnerability has been exacerbated “given the Federal Reserve’s more hawkish messaging at its September meeting,” pointing to a widening policy gap that continues to pressure EUR/USD sentiment.

Oil, Inflation, and the Canadian Dollar

Despite the negative impact from relative rate expectations, elevated crude prices are lending some support to the Canadian economy by reinforcing domestic inflation pressures. This backdrop offers partial backing to the underperforming CAD, even as rate differentials favor the Euro and the US Dollar.

Foreign exchange traders are actively searching for fresh catalysts, closely watching geopolitical developments in the Middle East that could drive volatility across currency markets.

Geopolitical Tensions Shape Risk Sentiment

Broader market mood remains heavily affected by developments in the Middle East. Sentiment has been particularly sensitive following US President Donald Trump’s rejection of Iran’s latest proposal to reopen the Strait of Hormuz.

While President Trump argued that Tehran had miscalculated its position, he indicated that talks are expected to resume shortly. He also voiced optimism that the dispute with Iran will be resolved soon, while at the same time leaving open the option of additional military action ahead of the upcoming US midterm elections.

Interest Rate Fundamentals

What Are Interest Rates?

Interest rates are charged by financial institutions on loans and paid to savers and depositors. They are guided by base lending rates set by central banks in response to economic conditions. Central banks typically aim to maintain price stability, often by targeting a core inflation rate around 2%.

If inflation falls below the target, the central bank may lower base rates to stimulate borrowing and economic activity. When inflation rises significantly above 2%, central banks usually respond by raising base lending rates to cool price pressures.

Impact of Interest Rates on Currencies

Higher interest rates generally bolster a currency because they increase the return available to global investors who place funds in that currency.

Impact of Interest Rates on Gold

Higher interest rates tend to weigh on Gold prices by increasing the opportunity cost of holding a non-yielding asset instead of interest-bearing instruments or cash deposits. Elevated rates also typically support the US Dollar (USD), and since Gold is priced in USD, a stronger Dollar often coincides with weaker Gold prices.

What Is the Fed Funds Rate?

The Fed funds rate is the overnight interest rate at which US banks lend reserves to one another. It is the key policy rate announced by the Federal Reserve after its FOMC meetings and is expressed as a range, such as 4.75%-5.00%. The upper bound of that range (in this example, 5.00%) is commonly referenced.

Market expectations for future moves in the Fed funds rate are monitored via tools such as the CME FedWatch, which influence how many financial markets position for upcoming Federal Reserve policy decisions.