Euro weakens against Canadian Dollar as ECB policy decision approaches

Euro remains under pressure before the ECB’s rate announcement as energy-related inflation risks linger.
Traders await signals on possible December rate hikes as the ECB is expected to retain its 2.50% deposit rate.
CAD gains support from the Bank of Canada’s 25 bps rate increase to 2.50% and indications of possible further tightening.

Pressure on EUR/CAD persisted during Thursday’s European trading hours, with the cross hovering near 1.5580 and extending a decline that started on 16 October. The move reflected weakness in the Euro (EUR) ahead of the European Central Bank’s (ECB) forthcoming monetary policy announcement.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Attention is turning to the ECB’s assessment of inflation risks and economic growth, alongside any guidance on the interest rate outlook. At Thursday’s meeting, the central bank is widely expected to leave its deposit rate at 2.50%, after raising rates by 50 basis points earlier this year. Yet continued inflationary pressure from energy prices has kept alive the debate over whether policymakers might restart rate increases in December.

Strength in the Canadian Dollar (CAD) also weighed on EUR/CAD after Wednesday’s October meeting saw the Bank of Canada (BoC) lift its benchmark overnight interest rate by 25 basis points to 2.50%. While economic uncertainty calls for a cautious approach, BoC Governor Tiff Macklem indicated that additional rate increases may be necessary. The central bank’s official statement supported its hawkish position, citing continued resilience in the global economy as the reason for a modest upward revision in its 2026 global GDP growth forecast to 3.1%. Its forecasts for 2027 and 2028 were left at 3.2%.

Despite the Bank of Canada’s latest rate hike, Danske Bank analysts pointed to a muted market response. They noted that “USD/CAD and the 2Y swap rate were about unchanged on the news,” highlighting the absence of a material move in key Canadian currency and interest rate benchmarks following the policy change.

Euro: Key Questions Answered

Which countries use the Euro, and how widely is it traded?

Used by the 20 European Union countries within the Eurozone, the Euro ranks second only to the US Dollar among the world’s most actively traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, when average daily turnover exceeded $2.2 trillion. Among currency pairs, EUR/USD leads global trading with an estimated 30% share of all transactions. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What role does the ECB play in the Euro’s performance?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, determining interest rates and overseeing monetary policy. Maintaining price stability is its core mandate, whether through curbing inflation or encouraging growth. Interest rate increases and cuts are its main policy instruments. The Euro generally benefits when rates are relatively high or are expected to rise; the reverse also applies. Monetary policy is decided 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.

Why do inflation readings matter for the Euro?

Measured through the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An increase in inflation beyond expectations, particularly above the ECB’s 2% target, requires the central bank to raise interest rates to restore control over prices. When interest rates are relatively high compared with those elsewhere, the region becomes a more attractive destination for global investors’ funds. This usually supports the Euro.

Which economic indicators can move the Euro?

By revealing the economy’s health, data releases can affect the Euro’s performance. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can steer the single currency. Economic strength supports the Euro by drawing in greater foreign investment and potentially prompting the ECB to increase interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular attention is paid to figures from Germany, France, Italy and Spain. These four largest euro area economies together represent 75% of the Eurozone’s economy.

Why is the Trade Balance important for the Euro?

The Trade Balance is another closely watched release for the Euro, capturing the gap between a country’s export earnings and its spending on imports during a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore supports the currency, while a negative balance has the opposite effect.