Euro edges higher vs CAD as BoC raises rates, focus shifts to ECB

EUR/CAD trades around 1.5640 on Wednesday, gaining 0.06% at the time of writing, despite the Bank of Canada’s (BoC) decision to raise its benchmark interest rate by 25 basis points (bps) to 2.50%. The widely anticipated move provided limited support to the Canadian Dollar (CAD), as investors assess the central bank's cautious outlook for further monetary tightening.

The BoC announced its decision on Wednesday, citing persistent inflationary pressures linked to elevated energy prices. The central bank warned that prolonged increases in energy costs could spread to other goods and services, making inflation harder to contain.

In its monetary policy statement, the BoC highlighted that businesses have so far absorbed much of the increase in input costs. However, recent business surveys suggest that companies could increasingly pass these higher costs on to consumers over the coming year, adding to inflationary pressures.

The central bank also left the door open to further interest rate increases, although policymakers stressed the need to proceed carefully amid considerable economic uncertainty. The BoC noted that longer-term inflation expectations remain well anchored, while several indicators continue to point to excess supply in the Canadian economy.

Uncertainty surrounding Canada's trade relationship with the United States (US) also remains a significant risk to the economic outlook, potentially limiting the central bank's room for further tightening.

Market attention now shifts to BoC Governor Tiff Macklem's press conference. Investors will closely examine his comments for indications of whether additional rate hikes could follow, particularly if elevated energy prices continue to fuel inflation.

Meanwhile, the Euro (EUR) faces its own monetary policy catalyst, with the European Central Bank (ECB) scheduled to announce its interest rate decision on Thursday. The ECB is widely expected to keep its deposit rate unchanged at 2.50%, following a cumulative 50-basis-point increase earlier this year. However, persistent energy-driven inflation has raised questions about whether policymakers could consider another rate hike in December.

Investors will therefore focus on the ECB's assessment of inflation risks and economic growth, as well as any indications regarding the future path of interest rates.

Against this backdrop, the EUR/CAD pair remains caught between two central banks facing similar inflationary challenges. While the BoC's latest rate increase could support the Canadian Dollar, expectations of further tightening by the ECB may help the Euro maintain its resilience.