Hopes of ‘Soft’ Brexit Bolster GBP/CAD Exchange Rate
After starting the session at a six-week low, the Pound Canadian Dollar (GBP/CAD) exchange rate surged last week thanks to some upbeat Brexit news.
However, Sterling still suffered some setbacks in the first half of the week as the UK’s latest trade balance came in lower than expected.
Almost all the GBP/CAD gains came in the second half of the week after claims emerged that Spain and the Netherlands would support the UK’s efforts to maintain a close trading relationship with the EU.
Meanwhile, the Canadian Dollar came under considerable pressure mid-week as Canadian officials hinted it was likely that Trump would pull out of the NAFTA trade agreement.
Canadian Dollar (CAD) Bolstered as Investors Await Possible BoC Rate Hike
Canadian Dollar exchange rates are showing a little more resilience this week however as markets await the Bank of Canada’s (BoC) rate decision on Wednesday.
Economists forecast that, given Canada’s recent growth and strong labour figures, the bank will kick off its first meeting of 2018 by raising interest rates. Any decision to hike rates is likely to prompt CAD to rally.
Some analysts remain a little more pessimistic however, suggesting the Canadian Dollar is overbought and that a correction is long overdue.
This is partly due to the ongoing uncertainty over the fate of NAFTA, with concerns that Canada’s economic growth is likely to take a considerable hit should the US end the pact.
Instead, some analysts suggest that short-term movement in the Canadian Dollar will likely be driven by the 2018 outlook from the BoC rather than an actual rate hike.
Scott Lampard, head of global markets at HSBC Bank Canada said:
‘It is not so much the actual move this week that is going to cause the market reaction, it is the narrative around it and what does that mean for the future path of rates.’
Sterling (GBP) Exchange Rates Dip as Inflation Slides
At the same time the Pound is drifting slightly lower following a dip in the UK’s latest inflation figures.
According to data published by the ONS, UK inflation slid from a five-year high of 3.1% to 3% in December, in line with market expectations.
The slide in Sterling is likely down to the deceleration in inflation denting the chances of a rate hike from the Bank of England (BoE) in the next few months.
Lucy O’Carroll, chief economist at Aberdeen Standard Investments said:
‘This slowing in inflation takes the pressure off the Bank of England to raise rates in the short term.’
However with the drop in inflation also relieving some of the pressure on household finances, it may help to prevent any major losses for GBP.
GBP/CAD Forecast: Slumping UK Retail Sales Could Weaken Pound Exchange Rates
Looking ahead, movement in the GBP/CAD exchange rate for the remainder of this week will be dictated by the outcome of the BoC rate decision on Wednesday.
Looking past this, the Pound is likely to tumble at the end of the week with the release of the UK’s latest Retail Sales figures, with economists forecasting that sales growth will have slumped from 1.1% to -0.6% in December.
Meanwhile, the Canadian Dollar could find some additional support this week from a surge in oil as prices hover near a three-year high.