Euro drops against Canadian Dollar despite stronger German Retail Sales

• EUR/CAD weakens as lower prices lead markets to scale back ECB rate hike expectations, countering German retail growth.
• Germany’s Retail Sales jumped 1.1% MoM and 1.8% YoY, comfortably beating forecasts.
• The commodity-linked CAD could struggle amid lower oil prices.

EUR/CAD depreciates after two days of gains, trading around 1.6220 during the early European hours on Tuesday. The currency cross remains subdued as the Euro (EUR) holds losses following the release of German Retail Sales data.

Germany’s retail sector saw a surprise rebound in May, with consumer spending jumping 1.1% month-on-month and 1.8% annually, comfortably beating market forecasts, according to Destatis. However, the strong consumer data is being balanced by retreating energy prices, causing markets to pare back aggressive European Central Bank (ECB) rate hike expectations.

While Oxford Economics and Capital Economics project that ECB interest rates have peaked, traders are still factoring in one final quarter-point increase to 2.50%, looking ahead to Tuesday's preliminary German inflation data for definitive direction.

The downside of the EUR/CAD cross could be limited as the commodity-linked Canadian Dollar (CAD) struggles under the weight of lower oil prices. Lower oil prices put downward pressure on the loonie dollar as Canada is one of the largest crude exporters.

Crude oil prices face downward pressure as traders monitor potential United States (US)-Iran talks in Doha later in the day amid a fragile interim ceasefire. Reuters cited KCM Trade Chief Market Analyst Tim Waterer, who noted that while investors are pricing in hopes for a positive outcome, a true normalization of oil flows through the Strait of Hormuz remains unseen. "The market is cautiously hopeful but still hedging its bets until we see more tangible signs of de-escalation," Waterer stated.