EUR/CAD drops sharply to near 1.4300 despite investors anticipating an unchanged BoC policy

• EUR/CAD has dropped sharply to near 1.4300 due to anxiety ahead of BoC policy.
• An unchanged interest rate decision with a hawkish commentary is expected from the BoC.
•  ECB policymakers are still supporting more interest rate hikes despite bleak economic prospects.

The EUR/CAD has delivered a breakdown of the consolidation formed in a narrow range of 1.4320-1.4340 in the London session. The asset has dropped to near the round-level support of 1.4300. More action is anticipated from the pair ahead of the interest rate decision by the Bank of Canada (BoC).

BoC Governor Tiff Macklem has been keeping interest rates steady at 4.5% in their last two monetary policy meetings, reiterating that the current policy is restrictive enough to give a tough fight to Canada’s inflation. Also, Canada’s inflation has sharply slowed to 4.4% in April from post Covid high of 8.1% recorded in June 2022.

Analysts at ING expect the BoC to leave the policy rate at 4.5%, but after stronger-than-expected consumer price inflation and GDP and with the labor data remaining robust, we cannot rule out a surprise interest rate increase. A hawkish hold should be enough to keep the Canadian Dollar supported.

Later this week, Canada’s Employment data (May) will be of utmost importance. As per the preliminary report, the economy added fresh 23.2K jobs in May lower than April’s addition of 41.4K. The Unemployment Rate is seen rising to 5.1% from the former release of 5.0%.

Meanwhile, the Euro has come under pressure after German Factory Orders contracted sharply and Eurozone Retail Sales remained stagnant. However, European Central Bank (ECB) policymakers are still supporting more interest rate hikes amid persistence in core inflation. ECB President Christine Lagarde conveyed in the last monetary policy meeting that more than one interest rate hike is appropriate.