Euro gains against Canadian Dollar as ECB-BoC rate gap widens

The Euro strengthened against the Canadian Dollar for the third straight day, reaching approximately 1.6110 during European trading hours on Monday. This appreciation of the Euro is attributed to the widening interest rate gap between Canada and other major economies, primarily driven by expectations of a widening gap between the Bank of Canada's (BoC) steady 2.25% key policy rate and the US Federal Reserve's and European Central Bank's (ECB) recent rate hikes.

The BoC maintained its rate at 2.25% during its September meeting, while the Fed increased its benchmark rate by 25 basis points, bringing the Fed funds target range to 3.75%-4.00%, and the ECB raised its deposit rate to 2.50%. Market projections suggest a 45% probability of another 25 bps rate hike by the ECB in October, with a full increase anticipated by December.

However, HSBC analysts caution that the Euro "remains vulnerable to uncertainty over the European Central Bank’s appetite to raise rates," particularly due to the Fed's more hawkish stance. Despite these challenges, the Canadian economy benefits from elevated oil prices, supporting the CAD and pressuring domestic inflation upward.

Forex traders are eagerly awaiting new market catalysts as they monitor escalating geopolitical tensions in the Middle East, especially following US President Donald Trump's rejection of Iran's latest proposal to reopen the Strait of Hormuz.