Euro drops against Canadian Dollar ahead of ECB policy decision

The Euro (EUR) against the Canadian Dollar (CAD) is experiencing a decline, having started a downward trend on October 16 and reaching approximately 1.5580 during European trading hours on Thursday. This depreciation occurred as the Euro faced pressure ahead of the European Central Bank’s (ECB) upcoming decision. The ECB is anticipated to maintain its deposit rate at 2.50% during Thursday’s meeting, following earlier rate hikes totaling 50 basis points.

However, concerns over energy-driven inflation have sparked discussions about potential rate hikes in December. Market participants are closely monitoring the ECB’s assessment of inflation risks, economic growth, and any clues regarding future interest rate paths. Meanwhile, the Canadian Dollar (CAD) strengthened following the Bank of Canada (BoC) raising its benchmark rate by 25 basis points to 2.50% at its October meeting.

BoC Governor Tiff Macklem suggested further rate hikes could be required, though the central bank plans to proceed cautiously due to economic uncertainties. The BoC also revised its 2026 global GDP growth forecast slightly upward to 3.1%, while keeping projections for 2027 and 2028 at 3.2%. Analysts from Danske Bank noted limited market reaction to the Bank of Canada’s latest policy move, with USD/CAD and the 2-year swap rate remaining relatively unchanged.

The Euro is the official currency of the 20 European Union countries comprising the Eurozone and is the second most traded currency globally, after the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover exceeding $2.2 trillion. The European Central Bank (ECB) in Frankfurt, Germany, is responsible for the Eurozone’s reserve bank functions, including setting interest rates and overseeing monetary policy.

The ECB’s main objective is to preserve price stability, which involves controlling inflation or stimulating growth through interest rate adjustments. Higher interest rates or expectations of future hikes generally favor the Euro. Eurozone inflation data, tracked by the Harmonized Index of Consumer Prices (HICP), play a crucial role in determining ECB policy decisions.

If inflation exceeds expectations, particularly surpassing the ECB’s 2% target, the central bank may need to raise interest rates to bring inflation under control. Stronger economic data, such as GDP growth, manufacturing and services PMIs, employment figures, and consumer sentiment, can positively impact the Euro by attracting foreign investment and potentially prompting the ECB to raise interest rates, thereby strengthening the single currency.

Conversely, weak economic indicators could weaken the Euro. Euro area data releases, particularly those from the four largest economies (Germany, France, Italy, and Spain) representing 75% of the Eurozone’s economy, and the Trade Balance indicator measuring the difference between exports and imports, hold significant importance for the Euro.