Euro Rises vs CAD on German Data and Lower Oil Prices

Key Moments

Euro Strengthens Against Canadian Dollar

EUR/CAD is higher by more than 0.5% after posting modest gains the previous day, with the pair trading around 1.5680 during Asian hours on Monday. The move reflects continued resilience in the Euro following the latest batch of German economic figures.

German Manufacturing Holds Firm While Retail Sales Disappoint

The S&P Global Germany Manufacturing PMI was confirmed at 54.2 in October. This reading is the second-strongest in almost four-and-a-half years, just below August’s recent high, and compares with 53.9 in September.

However, German consumer activity showed notable weakness. Retail Sales, a key barometer of household spending, declined by 2.0% month-on-month in September. This followed a revised 1.2% increase in August, previously reported as 1.3%. The September result was significantly below market expectations for a 0.4% rise.

On a year-on-year basis, Retail Sales came in at -2.3% in September, versus a prior 0.3% decline, which was revised from -0.4.

Canadian Dollar Pressured by Softer Oil Prices

The upward move in EUR/CAD also reflects softness in the commodity-linked Canadian Dollar, which is facing headwinds from declining crude prices.

Oil benchmarks moved lower after OPEC+ agreed to keep oil production targets for December unchanged, maintaining required output at September levels. As part of this framework, Saudi Arabia’s allocation is set at 10.478 million barrels per day (bpd), Russia’s at 9.949 million bpd, and Iraq’s at 4.431 million bpd.

Additional downside pressure on crude emerged as market participants weighed diplomatic efforts to halt the Middle East conflict against concerns over possible renewed US military action against Iran. Officials from Qatar and Iran continued talks for a third straight day, seeking a path to end the war ahead of the US midterm elections.

Energy Market Dynamics and Risk Sentiment

Broader energy market developments have added to volatility across risk assets. Strategists at Deutsche Bank observed that the past month featured overlapping sources of stress as “investors grappled with mounting doubts around the AI trade, French sovereign stress, and higher energy prices.”

In their review, they pointed out that Brent crude “(+13.6%) extended its rise amid concerns over renewed US-Iran escalation,” illustrating how geopolitical risks have flowed directly into the energy space. European gas markets also tightened, with “European natural gas [rising] above €100/MWh for the first time since 2022,” adding further strain to an already challenging environment for risk assets.

Euro: Structure, Policy, and Key Drivers

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The Role of the ECB

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Inflation Data and the Euro

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Broader Economic Releases and Currency Impact

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Trade Balance as a Key Euro Indicator

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.