The Euro (EUR) weakens against the Canadian Dollar (CAD) on Tuesday as rising Oil prices linked to the US-Iran conflict continue to support the commodity-linked Loonie, even as the latest Canadian inflation data came in softer than expected. At the time of writing, EUR/CAD is trading around 1.5970, hovering near two-week lows.
Statistics Canada reported on Tuesday that the Consumer Price Index (CPI) rose 0.4% MoM in April, slowing from the 0.9% increase recorded in March and missing market expectations of 0.6%. On an annual basis, CPI accelerated to 2.8% from 2.4% previously, though the reading still came in below the 3.1% forecast.
Meanwhile, the Bank of Canada’s (BoC) core CPI eased to 2.1% YoY in April from 2.5% in the previous month, suggesting that higher energy prices are not yet spilling into broader inflation pressures.
The softer-than-expected inflation data, combined with weaker labor market figures released earlier this month, could allow the BoC to keep its current policy stance unchanged as policymakers continue to look through the impact of higher energy prices.
However, markets continue to price in the possibility of a rate hike later this year if Oil-driven price pressures begin feeding more broadly into the economy.
Attention now turns to the Eurozone inflation data due on Wednesday, which could provide fresh clues on the European Central Bank’s (ECB) policy outlook. Economists expect the Core Harmonized Index of Consumer Prices (HICP) to remain unchanged at 2.2% YoY in April, while the monthly headline HICP is also forecast to hold steady at 1.0%.
Traders are currently pricing in at least two ECB rate hikes by the end of the year. However, the Eurozone’s heavy dependence on imported energy and the growing risk of slower economic growth are raising questions over whether the ECB will be able to raise interest rates as much as markets expect.
ECB policymaker François Villeroy de Galhau said on Tuesday that the central bank “will be ready to act as needed,” while Joachim Nagel stated that the ECB will base its June decision on incoming data. Nagel also warned that the Eurozone is moving away from the baseline economic scenario and said the current energy supply shock appears more persistent.
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