The Euro weakened against the Canadian Dollar on Tuesday as rising oil prices linked to the US-Iran conflict supported the CAD. EUR/CAD traded near 1.5970, close to two-week lows.
Canada’s CPI rose 0.4% month-on-month in April, down from 0.9% in March and below the 0.6% forecast. Year-on-year CPI increased to 2.8% from 2.4%, but was under the 3.1% expected.
Canadian Core Inflation Cools
The Bank of Canada’s core CPI eased to 2.1% year-on-year in April from 2.5% previously. This came alongside weaker labour market figures earlier in the month.
The data may allow the BoC to keep policy unchanged for now, while oil prices remain elevated. Markets still price in a possible rate rise later this year.
Focus shifts to Eurozone inflation data due on Wednesday. Core HICP is expected to stay at 2.2% year-on-year, while monthly headline HICP is forecast to hold at 1.0%.
Markets are pricing in at least two ECB rate rises by year-end. Comments on Tuesday said the ECB will be ready to act if needed, with June decisions guided by incoming data and ongoing energy supply issues.
Oil Prices Drive Currency Pressure
With West Texas Intermediate crude oil holding above $95 a barrel, the EUR/CAD cross remains under significant pressure, challenging the 1.5970 level mentioned. This situation reminds us of the sharp oil-driven rally in the CAD during the second half of 2025, which consistently favored the loonie over the euro. The current geopolitical tensions are creating a powerful, if familiar, headwind for the pair.
The recent miss on Canadian CPI, which came in at 2.8% instead of the expected 3.1%, is being completely overshadowed by these energy prices. We see this confirmed as recent data shows Canadian energy product exports rose 4.5% last quarter, directly linking the currency’s strength to oil shipments. This creates a clear divergence where the currency’s value is detached from domestic inflation fundamentals.
Attention now correctly shifts to the Eurozone HICP data, as markets have priced in at least two ECB rate hikes this year based on recent hawkish commentary. However, we believe this conviction is fragile, especially as recent German factory orders unexpectedly fell by 0.8% last month. This underlying economic weakness, amplified by the Eurozone’s heavy reliance on energy imports, makes aggressive ECB tightening a very risky proposition.
This divergence suggests traders should consider buying volatility on EUR/CAD rather than taking a simple directional bet. An unexpectedly dovish turn from the Bank of Canada, prompted by weak domestic data, could cause a sharp rally, while a surprisingly resilient Eurozone inflation print could do the same. Conversely, a further escalation in oil-related tensions would likely send the pair tumbling much lower.
We are seeing this uncertainty reflected in the options market, with one-month risk reversals for EUR/CAD showing a distinct bias for puts over calls. This indicates traders are paying a premium to protect against further downside driven by oil prices. A contrarian trader might see an opportunity in selling these expensive puts if they believe the Canadian inflation data will eventually force the BoC to soften its stance.
