- EUR/CAD receives downward pressure amid rising odds of further interest rate cuts by the European Central Bank.
- Germany’s Retail Sales grew by 1.8% YoY in December, falling short of the expected 2.5% increase.
- US President Donald Trump reiterated his plans to impose 25% tariffs on Mexico and Canada.
EUR/CAD retraces its recent gains from the previous two sessions, hovering around 1.5020 during early European trading hours. The currency cross remains under pressure following weaker-than-expected German Retail Sales data released on Friday. Market participants now turn their attention to upcoming Unemployment Rate and Consumer Price Index (CPI) figures from Germany due later today.
Germany’s Retail Sales fell by 1.6% month-over-month in December, as reported by Destatis on Friday. This decline followed an upwardly revised of no growth in November and missed market expectations of a 0.2% increase. On a yearly basis, Retail Sales grew by 1.8%, falling short of analysts' forecasts of 2.5%.
On Thursday, preliminary data from Eurostat reported that the Eurozone economy stagnated in Q4 2024 after expanding by 0.4% in Q3. This flat growth was weaker than the anticipated 0.1% increase, adding to concerns about economic momentum in the region.
The Euro remains under pressure amid growing expectations of further interest rate cuts by the European Central Bank (ECB). On Thursday, the ECB lowered its Deposit Facility Rate by 25 basis points (bps) to 2.75%, while the Main Refinancing Operations Rate dropped to 2.9%, in line with forecasts. Markets had already priced in the rate cut, expecting inflation in the Eurozone to remain on a trajectory toward the central bank’s 2% target.
However, EUR/CAD’s downside may be limited as the Canadian Dollar (CAD) faces headwinds due to a dovish shift in the Bank of Canada's (BoC) policy stance. On Wednesday, the BoC reduced its key interest rate by 25 bps to 3.0% and ended its quantitative tightening program, signaling plans to resume asset purchases in early March.
Adding to CAD’s challenges, US President Donald Trump reiterated his intention to impose 25% tariffs on Mexico and Canada—United States’ (US) top two trading partners. The BoC’s policy outlook was further dampened by concerns over potential US trade restrictions, with Governor Tiff Macklem emphasizing that tariff threats remain a significant risk to the Canadian economy.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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