Euro strengthens against Canadian Dollar ahead of Germanys HICP data

EUR/CAD appreciates after two days of losses, trading around 1.6120 during the European hours on Monday. Traders are closely watching for further directional cues from Germany's preliminary Consumer Price Index (CPI) and Harmonized Index of Consumer Prices (HICP) inflation data, set to be released later in the day.

Strategists at BNY Mellon highlight that the policy backdrop is turning increasingly challenging for ECB doves, noting that “the odds are stacked against the doves as the week ahead sees key inflation releases in Germany and the broader Eurozone.” They point out that recent “upside surprises in France and Spain have provided validation for the hawks,” reinforcing the case for further tightening. Reflecting this shift in sentiment, BNY Mellon adds that “OIS markets now suggest a 97% chance of a hike in the September meeting,” underscoring how firmly investors have moved to price in additional ECB action ahead of the upcoming CPI prints.

Economists at Rabobank note that Friday‘s release of Eurozone retail sales for July is expected to show a modest improvement, with the data “expected to recover from a dip in June.” However, they caution that “the underlying trend remains lacklustre as households face slowing real wage growth,” underscoring persistent pressure on consumer demand. The bank also points to upcoming remarks from the ECB’s Philip Lane in Dublin, but stresses that “since –by then– the ECBs pre-rate decision quiet period has commenced, he may not address current policy issues,” limiting the scope for fresh policy signals ahead of the next meeting.

Despite potential momentum for the EUR/CAD cross, upside movement may remain capped as the commodity-linked Canadian Dollar gains support from rising crude oil prices. Oil markets surged following statements from Iran's Islamic Revolutionary Guard Corps (IRGC) claiming that a rogue supertanker caught fire in the Strait of Hormuz after striking two naval mines along the waterway's southern passage.

IRGC officials declared that the vessel was attempting an illegal transit through the strait, issued a stern warning, and reiterated that all maritime traffic must strictly adhere to Iranian regulations when navigating the area.

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECBs 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozones economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.