BoC hike matches expectations: Euro firms against CAD as attention turns to ECB

• Despite an interest rate increase by Canada's central bank, EUR/CAD posts a modest gain on Wednesday.
• 2.50% is the Bank of Canada's new policy rate. The 25 basis points increase matched market expectations.
• With a further rate increase possible in December, investors await the European Central Bank's decision on Thursday.

1.5640 is the level at which EUR/CAD is trading on Wednesday. At the time of writing, the pair is up 0.06% on the day, despite a 25 basis points (bps) increase in the Bank of Canada’s (BoC) benchmark interest rate to 2.50%. Support for the Canadian Dollar (CAD) was limited following the widely expected decision. Investors are weighing the central bank's cautious assessment of further monetary tightening.

Persistent inflationary pressures from high energy prices prompted the BoC's decision, announced on Wednesday. The central bank cautioned that sustained energy cost increases could feed through to other goods and services, complicating efforts to bring inflation under control.

Businesses have absorbed a substantial share of rising input costs to date, the BoC said in its monetary policy statement. Recent business surveys, however, indicate that more of these costs could be passed on to consumers over the coming year, intensifying inflationary pressures.

Further interest rate increases remain an option, but policymakers emphasised a careful approach given substantial economic uncertainty. Several indicators still suggest excess supply in Canada's economy, the BoC noted, while longer-term inflation expectations remain firmly anchored.

A further major risk to the economic outlook is uncertainty over Canada's trade relationship with the United States (US). This could constrain the central bank's scope for additional tightening.

BoC Governor Tiff Macklem's press conference is now in focus. Investors will scrutinise his remarks for signals that further rate increases could follow, especially if high energy prices keep driving inflation.

For the Euro (EUR), Thursday brings a separate monetary policy catalyst: the European Central Bank (ECB) interest rate decision. After a cumulative 50-basis-point increase earlier this year, the ECB is widely expected to leave its deposit rate at 2.50%. Still, sustained inflation driven by energy costs has prompted questions over whether policymakers could consider a further rate increase in December.

The ECB's assessment of inflation risks and economic growth will consequently draw close investor attention, alongside any signals on the future direction of interest rates.

Similar inflation challenges at both central banks leave EUR/CAD pulled in opposing directions. The BoC's latest rate increase could underpin the Canadian Dollar. Expectations of additional ECB tightening, however, may sustain the Euro's resilience.