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Potential Catalan Independence Declaration Limits Euro Canadian Dollar Exchange Rate Upside

Although the European Central Bank (ECB) looks set to announce some tapering of its quantitative easing program at its October meeting the mood towards the Euro remains muted.

This is largely due to the fact that ECB President Mario Draghi is likely to maintain a relatively dovish tone in his latest commentary, regardless of any policy action.

With a tapering decision already well-telegraphed this limits any upside potential for the Euro, leaving EUR exchange rates vulnerable to downside pressure instead.

Developments in Catalonia are also weighing on the single currency, as the Spanish government prepares to impose direct rule on the region.

There are fears that President Carles Puigdemont could still opt to make a unilateral declaration of independence, something which would undoubtedly escalate the crisis further.

As Spain has shown no signs of willingness to engage in a constructive dialogue with the regional administration the issue looks likely to hang over the Euro for some time yet.

With the elevated levels of political uncertainty already weighing on domestic growth the Euro Canadian Dollar exchange rate is likely to remain under a bearish bias.

Any uptick in Friday’s German import price index figures, though, may offer a rallying point to the single currency ahead of the weekend.

Even if the prospect of the ECB raising interest rates remains distant signs of building inflationary pressure could still support EUR exchange rates.

BOC Dovishness Limits Canadian Dollar Appeal

Demand for the Canadian Dollar deteriorated significantly in the wake of the Bank of Canada’s (BOC) latest policy decision.

While there were not any particular expectations for the BOC to raise interest rates again markets were still disappointed when policymakers took a dovish outlook.

As analysts at Nomura noted:

‘In particular, Governor Poloz noted that the bank is “more preoccupied” with downside risks to inflation and that is also highlighted risks stemming from the NAFTA renegotiations.

‘Based on the BoC’s stance and still-tepid inflation pressures, we have pushed out the timing for the next rate hike from December 2017 to April 2018.

‘The adjustment in market interest expectations should weigh on the CAD near term.’

An unexpected uptick in US crude oil inventories also put pressure on the commodity-correlated Canadian Dollar, even as support for the OPEC-led production limiting agreement continued to strengthen.

In the absence of any fresh domestic data the ‘Loonie’ is likely to struggle to find any real traction ahead of the weekend, offering the EUR CAD exchange rate room to return to an uptrend.

Current EUR CAD Interbank Exchange Rates

At the time of writing, the Euro Canadian Dollar exchange rate was trending narrowly at 1.5117. Meanwhile, the Canadian Dollar Euro exchange rate was trending higher around 0.6611.