EUR/CAD moves below 1.6100 after pulling back from seven-year highs

EUR/CAD has pulled back from 1.6110, the highest since March 2018, marked on Tuesday.
ECB’s Lane said that the central bank must stand ready to counter any deviation in CPI.
The commodity-linked CAD struggles amid signs that OPEC+ may move forward with plans to increase Oil output.

Akhtar Faruqui FXStreet

EUR/CAD retreats after reaching 1.6110 on Tuesday, the highest since March 2018, trading around 1.6080 during the European session on Wednesday. The currency cross depreciates as the Euro (EUR) face challenges struggles, driven by the preliminary Eurozone inflation, which came in at 2% as expected, staying at the European Central Bank’s (ECB) target. Traders will likely observe Eurozone Unemployment Rate scheduled to be release later on Wednesday.

European Central Bank (ECB) Chief Economist Philip Lane said on Tuesday that the central bank must be prepared to respond to any deviation in Consumer Price Index (CPI). The next five years are expected to be dynamic, with 10% tariffs factored into the ECB’s baseline scenario, Philip added.

The European Union (EU) Commissioner Maros Sefcovic would travel to Washington to meet with US Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick in an effort to push the tariff talks forward, per Bloomberg.

The EUR/CAD may regain its ground as the commodity-linked Canadian Dollar (CAD) struggles due to subdued crude Oil prices, driven by the signs that OPEC+, Organization of the Petroleum Exporting Countries and its allies including Russia, will proceed with its planned output increase in August.

Canada suspended its plans to charge a new digital services tax targeting US technology companies just hours before this was due to start on Monday, to advance stalled trade negotiations with the United States. The move follows President Donald Trump's abrupt decision on Friday to walk away from talks over the proposed tax on American tech giants.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Akhtar Faruqui

FXStreet

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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