Core Inflation Concerns
On Monday, the EUR/CAD dropped by 0.30%, trading around 1.6250. This change followed mixed inflation data from Canada for October. While overall inflation has eased, underlying price pressures remain steady, making it harder for the Bank of Canada to consider rate cuts.
Canada’s annual Consumer Price Index (CPI) inflation fell to 2.2%. This is slightly above the expected 2.1% and down from 2.4% in September. Monthly CPI increased by 0.2%, matching predictions. Gasoline prices fell by 9.4%, and grocery inflation has eased. However, costs for services remain high due to rising prices in insurance, taxes, and mobile services.
Core inflation, which the Bank of Canada focuses on, continues to be stubborn. Core CPI climbed 0.6% monthly and 2.9% annually. This persistent core inflation limits the bank’s options, especially after indicating that rate cuts might stop if inflation doesn’t slow significantly.
Stability returned to the oil market as Russia’s Novorossiysk port reopened, reducing supply worries after a Ukrainian strike. This stability is important for the Canadian Dollar since Canada is a major oil exporter.
In Europe, the Euro is getting limited support from the European Central Bank’s comments that emphasize expectations for monetary stability. The mixed inflation data from Canada, the cautious ECB position, and developments in the oil market are all contributing to the downward trend of the EUR/CAD.
Bank of Canada and European Central Bank Divergence
The Bank of Canada is currently faced with challenges due to core inflation rising to 2.9%. This ongoing issue reminds us of the 2023-2024 period when steady price pressures forced the central bank to keep a strict policy longer than anticipated. As a result, markets have responded, with overnight index swaps showing less than a 10% chance of a rate cut before mid-2026.
This situation is very different in Europe, where the European Central Bank is maintaining its position. Last week’s Eurozone flash PMI data revealed continued declines in manufacturing activity, giving policymakers no reason to shift toward a more aggressive approach. This growing split between a potentially hawkish Bank of Canada and a neutral European Central Bank is likely to keep pressure on the EUR/CAD pair.
The oil market is providing a slight cushion, slowing down a sharper drop in the currency pair. WTI crude futures have struggled to break past the $85 resistance level throughout November, reducing the usual energy boost for the Canadian dollar. This stabilization limits any potential gains for the loonie at this time.
Given this situation, with a clear downward trend limited by stable oil prices, traders may want to consider strategies that take advantage of minimal upside movement. Selling out-of-the-money EUR call options or setting up bear call spreads could benefit from the expected price ceiling in the upcoming weeks. With one-month implied volatility for the pair rising to 8.5%, the premiums for these options are looking more appealing.
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