Canadian Dollar struggles against Euro as inflation accelerates to 3%

EUR/CAD edges higher on Monday, trading around 1.6070 at the time of writing, up 0.11% on the day. The pair maintains a positive bias despite a stronger-than-expected acceleration in Canadian inflation, which provides some support to the Canadian Dollar (CAD).

Canada’s Consumer Price Index (CPI) rose 3% YoY in July, following a 2.8% increase in June and exceeding market expectations. On a monthly basis, consumer prices increased by 0.5%.

The Bank of Canada’s (BoC) core inflation measure, which excludes more volatile components such as food and energy, rose 2.3% YoY and 0.2% MoM. The BoC’s other preferred inflation measures also point to a modest strengthening of price pressures. Common CPI accelerated to 2.7% from 2.6% previously, while Trimmed CPI rose to 1.9% from 1.8%, and Median CPI increased to 2% from 1.9%.

According to the released data, higher gasoline and travel tour prices contributed to the acceleration in headline inflation in July, while slower growth in prices for food purchased from stores limited the increase.

These figures could prompt investors to reassess the BoC’s monetary policy outlook, as persistent price pressures reduce the central bank’s room to adopt a more accommodative stance.

However, the Canadian Dollar fails to gain a lasting advantage over the Euro (EUR). The shared currency benefits from growing investor confidence that the European Central Bank (ECB) could tighten monetary policy further, with inflation remaining above the institution’s 2% target.

The latest Eurozone Gross Domestic Product (GDP) and employment data reinforce this outlook. The economy returned to growth in the second quarter after stagnating in the previous quarter, while employment continued to expand at a moderate pace. These figures therefore keep expectations alive for a potential 25-basis-point interest-rate hike from the ECB at its September meeting.

The EUR/CAD advance therefore suggests that the support provided to the Canadian Dollar by the upside inflation surprise remains insufficient, for now, to offset expectations of tighter monetary policy in the Eurozone.

ECB tightening path seen extending as Nordea shifts to quarterly hikes

Analysts at Nordea note that “the ECB’s message at the July meeting was still in line with further rate hikes to come,” and they “continue to expect three more 25bp increases, taking the deposit rate to 3%.” However, they explain that they “revised the expected path of these hikes last month from consecutive to quarterly moves,” with their “updated baseline” now assuming “25bp rate hikes in September, December and March 2027.”

Nordea highlights that geopolitical developments could materially alter this trajectory: “A quick and durable peace in the Middle East could reduce the pressure on the ECB to hike further, while a more notable escalation and longer-lasting disruption to energy markets could lead to faster and potentially more rate increases.” Even under the softer baseline, the bank argues that “even with a slower ECB hiking pace, we still see room especially for longer bond yields to climb, supported by ample bond supply, Eurosystem reductions in bond holdings and higher inflation-risk premia.”