EUR/CAD extends its gains for the third consecutive day, trading around 1.6110 during the European hours on Monday. The currency cross continues to appreciate as the Canadian Dollar (CAD) faces downward pressure, primarily driven by expectations of a widening interest rate gap between Canada and other major economies.
The policy divergent widened after the Bank of Canada (BoC) opted to hold its key policy rate steady at 2.25% during its September meeting. In contrast, both the US Federal Reserve (Fed) and the European Central Bank (ECB) raised their respective benchmark rates by 25 basis points, bringing the Fed funds target range to 3.75%–4.00% and the ECB deposit rate to 2.50%.
According to Reuters, financial markets are currently pricing in roughly a 45% chance of another 25 bps rate hike by the ECB in October, with a subsequent increase fully priced in no earlier than December.
However, HSBC analysts warn that the Euro “remains vulnerable to uncertainty over the European Central Bank’s appetite to raise rates,” especially in light of the Fed’s stance. They highlight that this vulnerability has been compounded “given the Federal Reserve’s more hawkish messaging at its September meeting,” underscoring a growing policy divergence that continues to weigh on EUR/USD sentiment.
Despite the headwinds from interest rate differentials, elevated oil prices are providing underlying support to the Canadian economy while keeping upward pressure on domestic inflation. Meanwhile, forex traders are searching for new market catalysts as they closely monitor escalating geopolitical developments in the Middle East.
Broad market sentiment remains heavily influenced by events in the region following US President Donald Trump’s rejection of Iran’s latest proposal to reopen the Strait of Hormuz. While President Trump stated that Tehran had overplayed its hand, he noted that negotiations are expected to resume shortly. Furthermore, he expressed confidence that the conflict with Iran will resolve soon, though he left open the possibility of additional military strikes prior to the upcoming US midterm elections.
