Euro gains modestly against CAD after expected BoC rate rise as attention turns to ECB

• Despite an interest rate increase by Canada’s central bank, EUR/CAD posts a modest gain on Wednesday.
• A 25 basis point rise took the Bank of Canada’s policy rate to 2.50%, matching market expectations.
• Ahead of a possible further rate increase in December, investors await Thursday’s European Central Bank decision.

A 25 basis point (bps) increase in the Bank of Canada’s (BoC) benchmark interest rate to 2.50% has not prevented EUR/CAD from edging higher on Wednesday. At the time of writing, the pair is trading near 1.5640, up 0.06% on the day. With the move widely expected, support for the Canadian Dollar (CAD) was limited as investors weighed the central bank’s cautious stance on further monetary tightening.

Persistent inflationary pressure from high energy prices underpinned the BoC’s decision, announced on Wednesday. Should energy costs continue to rise for a prolonged period, the central bank warned, the effects could feed through to other goods and services and make inflation harder to bring under control.

Much of the rise in input costs has so far been absorbed by businesses, the BoC noted in its monetary policy statement. Recent business surveys, however, indicate that firms could pass more of those higher costs on to consumers over the coming year, intensifying inflationary pressure.

Although further interest rate rises remain an option, policymakers emphasised that considerable economic uncertainty calls for a careful approach. Longer-term inflation expectations are still well anchored, according to the BoC, and several indicators continue to signal excess supply in Canada’s economy.

Canada’s uncertain trading relationship with the United States (US) remains another substantial risk to the economic outlook. This could constrain the central bank’s scope to tighten policy further.

BoC Governor Tiff Macklem’s press conference is now the focus for markets. His remarks will be scrutinised for clues as to whether further rate rises could follow, especially if high energy prices keep fuelling inflation.

For the Euro (EUR), the next monetary policy catalyst comes on Thursday, when the European Central Bank (ECB) announces its interest rate decision. Following a cumulative 50-basis-point increase earlier this year, the ECB is widely expected to leave its deposit rate at 2.50%. Persistent inflation driven by energy costs has nevertheless prompted questions over whether policymakers could contemplate another rate rise in December.

The ECB’s view of inflation risks and economic growth will consequently draw close attention, alongside any signals about the future course of interest rates.

With both central banks confronting similar inflation challenges, EUR/CAD remains pulled between their respective policy outlooks. The BoC’s latest rate rise could lend support to the Canadian Dollar, but expectations of additional ECB tightening may help the Euro remain resilient.