The euro remained weak against the Canadian dollar in early Asian trading on Thursday, holding near 1.6200 and extending the previous session’s decline. The move reflects renewed strength in the Canadian currency as easing tensions in the Middle East support demand for risk‑sensitive assets, even as oil prices fall.
Ceasefire hopes in Middle East support risk sentiment
Reports from diplomatic channels suggest Washington and Tehran are exploring an extension of the current two‑week ceasefire to allow further peace talks. The Strait of Hormuz remains partially restricted under a dual blockade, but Tehran could open commercial routes via the Omani side of the waterway if negotiations advance toward a broader peace framework.
The prospect of de‑escalation has prompted market participants to scale back the geopolitical risk premium built into asset prices, encouraging a shift back into pro‑cyclical and commodity‑linked currencies, including the Canadian dollar.
Canadian dollar benefits despite falling oil prices
The Canadian dollar’s strength comes despite a pullback in crude prices, a key export for Canada and a major input to its terms of trade. Brent futures have dropped below $95 per barrel and West Texas Intermediate is trading near $91, with Brent down roughly 8.25% over the past month as traders reduce conflict‑related risk pricing.
Typically, cheaper oil would limit gains in the Canadian currency. This time, broader risk‑on sentiment is outweighing the negative terms‑of‑trade impact, underscoring that overall market mood rather than direct commodity price dynamics is driving price action.
The Canadian dollar has also firmed against the U.S. dollar, with USD/CAD sliding toward 1.3730 amid the improved global risk backdrop.
Euro steady elsewhere as lower oil eases inflation risk
While softer against the Canadian dollar, the euro has been broadly stable versus other major currencies. Market participants are reassessing the inflation outlook in Europe as lower crude prices ease one of the main sources of cost pressure for the euro area.
Cheaper energy directly relieves headline inflation in an economy that is a net importer of fuel. This has reinforced expectations that the European Central Bank will keep monetary policy unchanged at its upcoming meeting, even as markets still price in some tightening later in the year.
Ecb seen on hold in April but tightening bets persist
The ECB is widely expected to leave its deposit rate at 2.0% at the April policy meeting. Market‑based indicators currently assign around an 88% probability that rates will remain on hold in the near term.
At the same time, pricing still implies two quarter‑point rate increases later this year, suggesting that traders do not view the recent drop in energy‑driven inflation as sufficient to remove the risk of renewed price pressures. Governing Council member Martins Kazaks has acknowledged these expectations, warning that any renewed rise in energy costs could still feed through into so‑called second‑round effects in wages and core prices.
Fragile ceasefire leaves sentiment vulnerable
The current market setup rests heavily on a ceasefire that remains temporary and fragile. The two‑week truce between Washington and Tehran is still subject to ongoing negotiations, and reports indicate that fundamental disagreements between the two sides persist despite talk of extending the pause in hostilities.
This leaves risk sentiment exposed to setbacks. Any breakdown in talks, renewed disruptions in the Strait of Hormuz, or surprise inflation data could quickly reverse the recent moves in currencies and commodities.
Volatile mix of falling oil and risk‑on mood
The combination of softer commodity prices and stronger demand for risk‑sensitive assets is creating an unstable equilibrium across markets. For the euro, lower energy costs are a clear short‑term positive for inflation and policy flexibility. For the Canadian dollar, the same move would usually be a headwind, but is currently being overshadowed by expectations of a more stable geopolitical environment and improved global growth prospects.
Traders in currencies and energy markets remain focused on incoming headlines from the Middle East and upcoming inflation releases, aware that relatively small shifts in either could trigger sharp price swings from current levels.
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