Euro steadies against Canadian Dollar ahead of Eurozone HICP inflation data

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EUR/CAD may face pressure as expected softer Eurozone inflation data may strengthen odds for a less restrictive ECB policy stance.
The ECB will likely hold rates next Thursday but could hike in September over energy risks.
Escalating US-Iran tensions and reported regional explosions threaten Middle East supply, potentially supporting the Canadian Dollar.

EUR/CAD remains flat after experiencing volatility, trading around 1.6070 during the early European hours on Friday. The currency cross may experience downward pressure due to potential weakness in the Euro (EUR). Expected softer Eurozone inflation data could strengthen the case for a less restrictive policy stance from the European Central Bank (ECB). Specifically, while the Eurozone Core Harmonized Index of Consumer Prices (HICP) inflation is projected to hold steady at 2.4% year-over-year and 0.2% month-over-month, the headline HICP is forecast to decline by 0.1% on the month.

According to reports from Reuters, the ECB is widely expected to keep interest rates unchanged next Thursday. However, policymakers are anticipated to implement a second-rate hike of the year in September. This potential shift is driven by a renewed surge in energy prices, which heightens the risk of more intense, long-term inflationary pressures across the region.

The EUR/CAD cross may further depreciate as the commodity-linked Canadian Dollar remains stronger on expectations that oil markets will soon regain their footing. Escalating military tensions and direct attacks between the United States and Iran have heavily intensified concerns over potential supply disruptions in the Middle East.

These energy supply anxieties spiked further following a Reuters report indicating that Iran has instructed Yemen’s Houthi militia to block the critical Red Sea shipping route if the U.S. strikes Iranian power infrastructure. Adding to the geopolitical volatility, Iran's Tasnim news agency reported explosions in Bandar Abbas, Qeshm, and Ahvaz, with separate blasts reportedly heard as far away as Kuwait and Basra.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.