EUR/CAD dropped to 1.6180 on Friday, losing 0.50% as strong Canadian economic data boosted the Canadian Dollar. Canada’s GDP grew 0.6% in Q3, bouncing back from a previous contraction and surpassing expectations with a 2.6% annual growth rate. This growth was fueled by rising exports and falling imports. In contrast, the Euro faced challenges amid mixed reports from the Eurozone. France’s Harmonised Consumer Price Index (HICP) remained steady at 0.8% year-on-year in November. Italy’s GDP slightly exceeded estimates with a 0.1% quarterly increase and 0.6% year-on-year growth. However, Germany’s inflation data sent mixed signals, with a headline CPI of 2.3% year-on-year in November and the harmonised HICP climbing to 2.6% year-on-year.

Monetary Policy Outlook

The European Central Bank may keep its monetary policy steady due to these mixed signals. On the other hand, the Bank of Canada is unlikely to cut rates any further after the positive GDP data, allowing the Canadian Dollar to strengthen. The currency heat map indicated that the Euro was strongest against the British Pound, while CAD gained ground across various pairs. The clear difference between the Bank of Canada’s positive outlook and the European Central Bank’s cautious stance points to a potential for continued weakness in EUR/CAD. Friday’s strong GDP report likely means another rate cut from the Bank of Canada is off the table for now. This policy difference is a key factor in our trading strategy. The Canadian economy shows solid strength that supports the Loonie. Recent statistics confirmed that the Q3 growth stemmed from an expanding trade surplus, which rose to C$5.2 billion, further backing the currency. With oil prices stable around $85 per barrel, the outlook for Canada’s terms of trade provides added support.

Eurozone Challenges

Meanwhile, the Eurozone faces ongoing issues with inconsistent data, making it hard for the ECB to consider a more aggressive approach. The latest S&P Global Eurozone Composite PMI flash estimate for November showed a contraction at 48.2, indicating continued economic weakness. This suggests that European rates will likely remain low for an extended period, putting pressure on the Euro. Given this situation, we should consider positioning for a further decline in EUR/CAD from its current level of 1.6180. Buying put options expiring in January 2026 is a way to take advantage of this anticipated drop while managing risk. The one-month implied volatility has climbed from 6.5% to 7.2% this week, signaling that the market is beginning to expect larger movements. We saw a similar trend from 2017 to 2018 when the Bank of Canada began to raise rates significantly before the ECB. During that period, the EUR/CAD pair experienced a notable and sustained drop due to divergent monetary policies. Historical patterns show that once these trends are set, they can gain considerable momentum. Create your live VT Markets account and start trading now.

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