EUR/CAD slipped back towards 1.5850 in European trading on Thursday, after a flat session. The move came as the Canadian Dollar found support from firmer oil prices.
WTI rose for a third session and traded near $75.00 a barrel. Prices were lifted by supply disruptions linked to the Middle East conflict.
US and Israeli strikes on Iran raised tensions, followed by Iranian attacks on energy infrastructure. Disruption has affected oil and gas flows, with the Strait of Hormuz handling about 20% of global oil and LNG supply.
The Euro eased ahead of January Eurozone Retail Sales data due later in the day. Annual sales are forecast to rise 1.7% after 1.3%, while the monthly figure is seen at 0.3% after a 0.5% fall.
ECB Governing Council member François Villeroy de Galhau said the ECB is monitoring energy markets during the war. He said the length of the conflict will affect prices and that there is no current reason to raise interest rates.
The euro is used by 20 EU countries and made up 31% of global FX transactions in 2022, with average daily turnover above $2.2 trillion. EUR/USD accounts for about 30% of trades, followed by EUR/JPY 4%, EUR/GBP 3%, and EUR/AUD 2%.
Looking back at the analysis from early 2025, we saw Middle East tensions driving oil prices and weakening the EUR/CAD pair. Today, the fundamental story remains but has evolved, with the pair now trading much lower near 1.4580. This is less about conflict-driven supply shocks and more a result of sustained high energy prices, as WTI crude holds firm above $82 per barrel.
The policy gap between the central banks has widened significantly since we saw the ECB holding steady in 2025. With Eurozone inflation now just under the 2% target, markets are pricing in an ECB rate cut by April. In contrast, the Bank of Canada is holding its rate at 3.5% due to a stronger domestic economy, a key factor supporting the Canadian Dollar.
For derivative traders, the environment has become one of low volatility, a stark contrast to the uncertainty of early 2025. Three-month implied volatility for EUR/CAD has compressed to near 5.8%, its lowest point in over a year. This suggests that strategies selling options, like short strangles or credit spreads, could be favorable to capitalize on the steady downtrend and decaying time value.
Unlike the focus on Eurozone retail sales we saw in the past, upcoming Canadian trade balance data is now more critical. Given robust energy exports, another strong surplus is expected, which would further bolster the CAD. Consequently, we see traders positioning for further downside in EUR/CAD by buying put options with strike prices below 1.4500.
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