EUR/CAD holds gains above 1.6150 as ECB’s cautious tone supports Euro

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EUR/CAD extends its gains for the third successive session, trading around 1.6170 during the early European hours on Tuesday. The currency cross gains ground as the Euro (EUR) receives support from the cautious sentiment surrounding the European Central Bank’s (ECB) policy outlook.

EUR/CAD rises as the Euro gains support from cautious sentiment around the ECB’s policy outlook.
ECB President Lagarde said policy is well-positioned, with interest rates expected to remain steady for an extended period.
The commodity-linked CAD holds steady as higher Oil prices are supported by geopolitical tensions.

The European Central Bank (ECB) decided to keep its key policy rate on hold at 2.0% in December, along with upgrades to growth and inflation forecasts. ECB President Christine Lagarde said that monetary policy is in a "good place" and rates will remain steady for a prolonged period.

On the data front, the German Import Price Index rose 0.5% month-over-month in November, exceeding the readings of expected 0.1% and 0.2% prior. The annual Import Price Index fell 1.9%, against the previous decline of 1.4%. Traders will likely shift their focus toward Canada’s monthly Gross Domestic Product (GDP) for October later in the day.

However, the upside of the EUR/CAD cross could be restrained as the commodity-linked Canadian Dollar (CAD) receives support from higher Oil prices amid geopolitical tensions, reflecting Canada’s status as the largest crude exporter to the US.

West Texas Intermediate (WTI) Oil price trades around $57.80 per barrel at the time of writing. Oil prices rise as traders remain focused on heightened geopolitical risks. US President Donald Trump said on Monday that the US would keep and maybe sell the Oil it had seized off the coast of Venezuela in recent weeks. Trump added that the US would also keep the seized ships.

Moreover, Ukraine continues strikes on Russian energy infrastructure, with the latest attack damaging two vessels and two piers and igniting a fire in a Black Sea coastal village, a key corridor for Russia’s energy exports.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.