Comments from Bank of England (BoE) Governor Mark Carney prompted the GBP CAD exchange rate to slump sharply last week, with the policymaker reiterating his neutral view on interest rates. However, fresh signs of an increasing split within the Monetary Policy Committee (MPC) soon followed as chief economist Andy Haldane took a more hawkish view. This was a particularly notable shift considering that Haldane has long been regarded as the most dovish member of the MPC and his remarks encouraged the Pound to strengthen sharply on bets that a rate hike could come as soon as June.
Demand for the Canadian Dollar picked up strongly in the wake of better-than-expected April retail sales figures. Signs that consumers remain confident and are continuing to spend encouraged investors to pile back into the ‘Loonie’. This stronger showing added to the sense of optimism surrounding the monetary policy outlook of the Bank of Canada (BOC), weighing down the GBP CAD exchange rate. As the odds of a BOC interest rate hike coming before the end of the year subsequently increased, this naturally improved the appeal of the Canadian Dollar.
GBP CAD Rallied on Weaker Canadian Inflation
However, the commodity-correlated currency came under fresh pressure as a result of mounting concerns regarding the oil market. While US stockpiles were found to have fallen further than forecast in the last week this was not enough to stave off worries of rising global production. As confidence in OPEC’s ability to lead the oil market faltered one again the Canadian Dollar was knocked off its bullish run, returning to a general downtrend.
Markets were not impressed by Canada’s May consumer price index, with inflation found to have dipped from 0.4% to 0.1% on the month. With risk appetite already weakened this offered fresh discouragement to investors, giving the GBP CAD exchange rate a rallying point ahead of the weekend. A weaker level of domestic inflationary pressure could discourage the BOC from taking a more hawkish policy stance, reducing the likelihood of a return to the tightening cycle.
As the Conservatives secured a confidence and supply arrangement with the controversial Democratic Unionist Party (DUP) the mood towards Sterling generally improved. Even though the Tory minority government remains decidedly fragile, this agreement nevertheless reduced the sense of political uncertainty surrounding the Pound. With Brexit negotiations progressing smoothly enough for the time being, Sterling’s downside bias diminished.
So long as signs from the UK economy point towards greater consumer resilience the Pound could hold onto its more positive footing. On the other hand, if consumer credit and mortgage approvals figures weakened in May, GBP exchange rates may struggle to avoid a fresh downtrend as the week continues.
Hawkish BOC Commentary Could Boost CAD
The latest speech from BOC Governor Stephen Poloz could provoke increased Canadian Dollar volatility. As long as Poloz maintains a positive view on the domestic economy the GBP CAD exchange rate could soften on continued bets of an imminent return to higher interest rates. On the other hand, if last week’s poor inflation data is seen to have shaken the policymaker’s confidence the mood towards the ‘Loonie’ could remain bearish.
If Friday’s gross domestic product data proves positive this could bolster the appeal of the ‘Loonie’ further. Sustained momentum within the domestic economy should increase the odds of a BOC interest rate hike by signalling that Canada remains in a more robust state of health. Even if market risk appetite remains muted and oil prices continue to be pressured by the global oversupply glut, a strong showing here could still see the GBP CAD exchange rate shedding ground.