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Euro advances against Canadian Dollar due to hawkish ECB sentiment

  • EUR/CAD appreciates as markets heavily price in an expected ECB interest rate hike on Thursday.
  • Traders fully priced in an ECB 25-basis-point hike to the 2.5% Rate On Deposit Facility as Eurozone inflation rose above 3% in August.
  • The commodity-linked CAD may draw support as oil prices climb following US strikes on Iranian tankers near Kharg Island.

EUR/CAD gains ground after two days of losses, trading around 1.6030 during the European hours on Wednesday. The Euro (EUR) receives support against the commodity-linked Canadian Dollar (CAD) as the European Central Bank (ECB) is widely expected to hike interest rates at its September policy meeting on Thursday, driven by surging energy prices due to the ongoing US-Iran conflict. Traders have fully priced in a 25-basis-point (bps) increase in the Rate on Deposit Facility as the latest data shows Eurozone inflation rose back above 3% in August.

ING's global head of macro Carsten Brzeski said, "We expect the ECB to hike rates by 25 basis points. Another insurance rate hike." "Or for those who don’t like this term: a dovish rate hike," Brzeski added.

The upside of the EUR/CAD cross could be restrained as the commodity-linked Canadian Dollar (CAD) may draw support from elevated oil prices, given Canada's position as one of the world's leading crude exporters.

Oil prices have climbed following a US strike on several Iranian tankers near Kharg Island, a major export hub. These attacks have heightened geopolitical tensions and stoked market concerns regarding potential disruptions to global oil supplies. A US official stated that the strikes were executed in response to an attempted missile attack on a US warship. In retaliation, Tehran launched ballistic missiles toward Jordan and issued warnings to vessels in the Persian Gulf, urging tanker crews near Kuwaiti and Bahraini ports to immediately abandon their vessels.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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