Middle East Supply Risks
Reports said US President Donald Trump gave Iran a 48-hour ultimatum to reopen the Strait of Hormuz or face possible strikes on energy infrastructure. Iran’s Islamic Revolutionary Guard Corps said it would fully shut the strait if the US proceeds, and reports also mentioned Washington weighing a ground operation to seize Iran’s Kharg Island oil export hub. The ECB left interest rates unchanged last week and said the conflict in Iran has made the outlook “significantly more uncertain”. It also referred to “upside risks to inflation and downside risks to growth”, and officials are due to speak later on Monday. The Canadian Dollar is influenced by Bank of Canada interest rates, oil prices, inflation, economic data, market risk appetite, and the trade balance. The BoC targets inflation at 1–3% and can also use quantitative easing or tightening to affect credit conditions. Looking back to early 2025, we saw EUR/CAD struggling near 1.5850, a level largely dictated by geopolitical fears driving oil prices. Today, the pair is trading in a completely different environment, hovering around 1.4720 as market dynamics have fundamentally shifted. The key tension from last year between high oil prices and a hawkish European Central Bank has now dissipated.Shift In Market Drivers
The extreme supply concerns that pushed West Texas Intermediate crude toward $98 a barrel in 2025 have since eased. With Middle East tensions de-escalated, WTI is now trading at a more stable $78 per barrel. This has removed a major pillar of support for the Canadian dollar that we saw last year, changing the calculus for the pair. On the monetary policy front, the situation has also inverted from what we observed in 2025. Last year, traders were betting on ECB rate hikes to fight inflation, but with Eurozone inflation now down to 2.4%, the ECB is holding rates steady and markets are beginning to price in cuts for late this year. This has capped any significant strength in the Euro, a stark contrast to the hawkish expectations of the past. The Bank of Canada faces a similar, yet slightly different, picture, with domestic inflation proving a bit more persistent at 2.7% as of the latest reading. This suggests the BoC may be slower to cut interest rates than the ECB, providing a subtle, underlying support for the Canadian dollar relative to the Euro. This policy divergence is now a more critical driver for the pair than the price of oil. Given this backdrop of lower oil prices and a looming rate-cutting cycle, implied volatility in EUR/CAD options has fallen considerably from the highs of 2025. Traders should consider strategies that benefit from range-bound price action and lower volatility, such as selling straddles or strangles. For those with a directional view, buying long-dated puts on EUR/CAD could be a way to position for a scenario where the ECB cuts rates before the Bank of Canada. Create your live VT Markets account and start trading now.
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