ECB in focus as euro inches higher against CAD following expected BoC rate hike

• A rate increase by Canada's central bank fails to prevent EUR/CAD from posting a modest gain on Wednesday.
• In a move that matched market expectations, the Bank of Canada lifted its policy rate to 2.50% with a 25 basis points increase.
• Thursday's European Central Bank decision is the next focus for investors, while a further rate increase in December remains possible.

The Canadian Dollar (CAD) draws little support from the Bank of Canada’s (BoC) widely expected rate hike, leaving EUR/CAD up 0.06% on Wednesday at around 1.5640 at the time of writing. The BoC raised its benchmark interest rate by 25 basis points (bps) to 2.50%, but investors are weighing its cautious stance on further monetary tightening.

Persistent inflation pressures stemming from high energy prices were behind Wednesday's decision, the BoC said. It cautioned that a sustained rise in energy costs could feed through to other goods and services, complicating efforts to bring inflation under control.

According to the BoC's monetary policy statement, businesses have absorbed a large share of the rise in input costs so far. Recent business surveys, however, indicate that firms could pass more of these costs on to consumers over the coming year, intensifying inflationary pressures.

Further rate hikes remain an option, though policymakers emphasised that considerable economic uncertainty calls for a careful approach. Alongside well-anchored longer-term inflation expectations, the BoC pointed to several indicators that still signal excess supply in Canada's economy.

Another major risk to the economic outlook is the uncertainty over Canada's trade ties with the United States (US). This could constrain the central bank's scope to tighten policy further.

BoC Governor Tiff Macklem's press conference is now in focus. Investors will scrutinise his remarks for clues on the possibility of more rate increases, especially if high energy prices keep driving inflation.

For the Euro (EUR), Thursday brings a monetary policy trigger of its own: the European Central Bank (ECB) is due to deliver its interest rate decision. After raising rates by a cumulative 50 basis points earlier this year, the ECB is widely expected to leave its deposit rate at 2.50%. Still, continued inflation driven by energy costs has prompted questions over whether policymakers might consider a further increase in December.

The ECB's view of inflation risks and economic growth will consequently be central to investor attention, together with any guidance on where interest rates may head next.

EUR/CAD thus remains pulled between two central banks confronting similar inflation pressures. The BoC's latest hike could lend support to the Canadian Dollar, but expectations of additional ECB tightening may sustain the Euro's resilience.