The Euro experienced significant volatility against the US Dollar, initially dropping sharply to a low of 1.1577 and closing at 1.1584, down 0.58% on Friday, before recovering to near 1.1600 with a 0.15% gain during Monday's European session [1][2]. United Overseas Bank analysts noted that while further downside is possible, oversold conditions may prevent a quick test of the 1.1550 support, with resistance seen at 1.1600/1.1625 [1]. The recovery was attributed to a correction in the US Dollar, which weakened by 0.15% to near 99.50 on the DXY index after a strong rally driven by hawkish remarks from Federal Reserve Chair Kevin Warsh at the Jackson Hole Symposium [2]. Warsh warned of persistent inflation risks and signaled openness to further rate hikes unless underlying inflation improves, shifting market expectations and reducing the probability of a Fed hold in September to 39.4% from nearly 60% a week prior, according to the CME FedWatch tool [2].
On the Eurozone side, higher-than-expected August inflation data from six German states supported expectations for a European Central Bank (ECB) rate hike [2]. BNY Mellon strategists highlighted that recent upside inflation surprises in France and Spain have reinforced the hawkish case, with OIS markets now pricing a 97% chance of an ECB hike in September [3]. Rabobank economists noted that Eurozone retail sales for July are expected to show modest improvement, but underlying consumer demand remains weak due to slowing real wage growth [3]. The ECB enters its pre-meeting quiet period, limiting further policy signals ahead of the rate decision [3].
In the Canadian Dollar space, EUR/CAD appreciated to around 1.6120 as traders awaited Germany's CPI and HICP data, while the commodity-linked CAD found support from surging crude oil prices amid Middle East tensions [3][4]. The USD/CAD pair pulled back from a two-week high near 1.3910-1.3915, with the US Dollar losing ground after Friday's rally but remaining supported by revived Fed rate hike bets and geopolitical uncertainties [4]. Technical analysis shows USD/CAD holding a bearish near-term tone below the 100-day SMA at 1.3917, with key support at 1.3847 and resistance at 1.3917/1.3922 [4].
Looking ahead, Brown Brothers Harriman expects the Bank of Canada (BoC) to keep its policy rate unchanged at 2.25% for a seventh consecutive meeting, as core inflation near 2% allows policymakers to cushion economic activity against US-Canada trade tensions [5]. BBH argues that market pricing of 75 bps of BoC hikes over the next twelve months is too aggressive, suggesting scope for dovish repricing and a potential move in USD/CAD toward 1.4000 [5]. The upcoming Canadian labor force survey is expected to show a gain of +15.0k jobs in August, with the unemployment rate holding at a two-year low of 6.4% [5].
CONCLUSION
The Euro's recovery and heightened ECB rate hike expectations, combined with hawkish Fed signals and a likely BoC hold, have driven significant FX market repricing. Market participants are closely watching upcoming inflation and labor data, which will be pivotal for central bank decisions and further currency moves. Overall, sentiment remains cautious but leans hawkish for both the Fed and ECB, while the BoC is expected to remain on hold.