Euro rises against Canadian Dollar due to lower oil prices, risk-on mood
- EUR/CAD rises as falling oil prices weaken the commodity-linked Canadian Dollar.
- WTI price decline as the US and Iran are nearing a 60-day ceasefire deal to demine and reopen the Strait of Hormuz.
- ECB rate hike odds rise as higher energy prices threaten to push inflation forecasts upward.
EUR/CAD extends its winning streak for the fourth consecutive day, trading around 1.6080 during the European hours on Monday. The currency cross is gaining ground as the commodity-linked Canadian Dollar (CAD) struggles due to lower oil prices, a direct result of Canada’s status as the largest crude exporter to the United States (US).
Crude oil prices have dropped as supply fears ease, driven by rising optimism over a potential US-Iran agreement. Reports indicate that the United States and Iran are close to signing a deal involving a 60-day ceasefire extension. Under this proposed agreement, the Strait of Hormuz would be reopened, and Iran would clear mines it deployed in the waterway to allow ships to pass freely. In exchange, the United States would lift its current blockade on Iranian ports.
Meanwhile, traders are awaiting speeches from European Central Bank (ECB) policymakers later this week, including President Christine Lagarde, for fresh market impetus. The ECB has hinted that rising energy prices might push this year's inflation forecasts upward, supporting the case for a potential interest rate hike this year. While the case for the ECB to raise interest rates in June is nearly sealed, the central bank is likely to remain noncommittal about further moves in an effort to temper market bets for a quick follow-up step in July.
European Central Bank policy governing council member and Governor of the Bank of Greece, Yannis Stournaras, noted during Monday's European trading session that the closure of the Strait of Hormuz, a critical passage for nearly 20% of the global energy supply, could have secondary effects on wages and the prices of goods and services. Stournaras emphasized the necessity of ensuring inflation returns to the medium-term target of 2%.
Additionally, ECB member and head of the Austrian central bank, Martin Kocher, stated at a meeting of European finance ministers in Cyprus that the central bank is heading for an interest-rate increase next month unless a sustainable peace deal between the United States and Iran can be reached.
Euro FAQs
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’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. 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 ECB’s 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. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. 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 Eurozone’s 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.