Euro weakens against Canadian Dollar as ECB policy decision approaches

Ahead of the ECB’s rate announcement, the Euro slips as energy-related inflation risks remain.
2.50% deposit rate hold expected from the ECB; traders watch for signals of possible December increases.
25 bps Bank of Canada hike takes rates to 2.50%, supporting CAD and signalling scope for further tightening.

EUR/CAD trades near 1.5580 in Thursday’s European session. The cross extends a run of losses dating from 16 October, with the Euro (EUR) retreating before the European Central Bank’s (ECB) forthcoming policy announcement.

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A deposit rate hold at 2.50% is widely anticipated at Thursday’s ECB meeting, after increases totalling 50 basis points earlier this year. Debate over a possible return to rate rises in December nevertheless continues, as energy-driven inflation persists. Investors are therefore examining the ECB’s assessment of inflation risks and economic growth, alongside any guidance on the interest rate outlook.

A firmer Canadian Dollar (CAD) added to EUR/CAD’s downward pressure. At its October meeting on Wednesday, the Bank of Canada (BoC) lifted the benchmark overnight interest rate by 25 basis points to 2.50%. Further increases may be necessary, according to BoC Governor Tiff Macklem, although economic uncertainty means policymakers plan to proceed cautiously. The BoC’s official statement reinforced its hawkish position: continued resilience in the global economy led it to raise its 2026 global GDP growth forecast slightly to 3.1%. Its 2027 and 2028 forecasts remained at 3.2%.

The latest Bank of Canada rate rise drew only a muted response from markets, analysts at Danske Bank observe. They note that “USD/CAD and the 2Y swap rate were about unchanged on the news,” highlighting the lack of a material move in key Canadian currency and interest rate benchmarks following the policy change.

Euro FAQs: Key Facts

20 EU Countries: The Euro’s Role

Used by the 20 European Union countries within the Eurozone, the Euro ranks behind only the US Dollar in global currency trading. During 2022, its share of foreign exchange transactions reached 31%, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

ECB Policy: Its Influence on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing monetary policy. Price stability is its core mandate, pursued through controlling inflation or stimulating growth. Adjustments to interest rates are its main policy instrument. Higher relative rates, or expectations that rates will rise, generally support the Euro; lower rates have the opposite effect. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation Data: Implications for the Euro

Measured using the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. A larger-than-expected rise in inflation, particularly beyond the ECB’s 2% target, requires the central bank to increase interest rates to restore control over prices. When the region’s interest rates are higher than those elsewhere, the Euro usually benefits. The higher rates make the region a more attractive destination for global investors’ funds.

Economic Indicators: Drivers of the Euro

The Euro can respond to economic releases because they provide a measure of economic health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can each help determine the single currency’s direction. Economic strength supports the Euro by drawing in more foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic figures, by contrast, are likely to weigh on the Euro. Particular attention is paid to Germany, France, Italy and Spain, the euro area’s four largest economies. Together, they represent 75% of the Eurozone economy.

Trade Balance: Support or Pressure for the Euro

The Trade Balance is another important release for the Euro. Over a specified period, it captures the gap between a country’s export earnings and its expenditure on imports. Strong demand for a country’s exports generates additional currency demand from overseas buyers purchasing those goods. That demand alone can lift the currency’s value. A positive net Trade Balance therefore supports a currency, while a negative balance has the reverse effect.