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Euro holds gains as traders expect ECB rate hike in June

  • EUR/CAD rises as the ECB is set to deliver a 25-basis-point rate hike on the Deposit Facility on Thursday.
  • Markets eye the ECB's economic projections and Lagarde's speech to gauge if today's expected rate hike signals further tightening.
  • The Canadian Dollar weakens as oil prices may decline following reports of the US completing military strikes in Iran.

EUR/CAD recovers its recent losses registered in the previous day, trading around 1.6110 during the early European hours on Thursday. The currency cross appreciates as the Euro (EUR) receives support ahead of the European Central Bank’s (ECB) policy decision due later in the day.

Traders widely expect the ECB to deliver a 25-basis-point rate hike on the Deposit Facility at its June policy meeting. Policymakers address the threat of second-round inflation effects amid elevated energy prices. This would be its first rate increase in three years.

Traders will closely monitor the ECB’s projections for inflation and economic growth. The market is pricing in three rate rises for the rest of the year. Also, ECB President Christine Lagarde's press conference could give hints as to whether the hike is a one-and-done rate adjustment or if more tightening is likely this year.

The EUR/CAD cross appreciates as the commodity-linked Canadian Dollar (CAD) faces challenges as investors expect oil prices to ease after the US military announced it had completed its latest strikes on Iran, raising hopes that peace negotiations could resume and tempering oil supply concerns. It is worth noting that Canada is a major oil exporter, and the CAD is heavily classified as a commodity currency.

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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