GBP CAD Exchange Rate Flat on Widening UK Deficit after Week of Gains

The UK’s public sector deficit widened above forecasts during October, which has caused the Pound Sterling to Canadian Dollar exchange rate to weaken this morning.

GBP CAD is stuck around opening levels of 1.6962, after figures showed that the government borrowed -£8 billion last month; up from -£5 billion previously and above economists’ expectations of a -£7.1 billion overspend.

Pound Sterling (GBP) Exchange Rates Climb Steadily despite Softening Monetary Policy Outlook

October inflation data disappointed after showing that the pace of price growth held steady at 3% year-on-year overall and at 2.7% in the core index, against expectations of a 0.1% uptick in both fields.

This data predates the Bank of England’s (BoE) vote to hike interest rates, so the slower-than-expected pace of consumer price index growth before tighter borrowing costs can be felt suggests another interest rate hike likely won’t be needed.

The Pound has received a boost this week, however, after Downing Street confirmed that the Cabinet was prepared to increase its offer to the European Union to cover the costs of the Brexit divorce.

Members of the Cabinet, including Chief Brexiters Michael Gove and Boris Johnson, are apparently willing to pay costs of up to €40 billion, although this is on the condition that the UK receives a favourable deal.

This move could finally break the deadlock that has seen negotiations stalled for weeks, opening up the possibility of trade discussions in December.

GBP CAD Gains on Sparse and Disappointing Canadian Data Calendar

The Canadian data calendar over the past few days has been quiet by comparison to the UK’s, which has left CAD with fewer sources of support and therefore allowed the Pound Canadian Dollar exchange rate to climb.

The only data that was particularly positive was the surprise 0.5% growth in manufacturing sales during September, instead of the forecast -0.5% decline.

Friday’s consumer price index figures showed the weakening rate of price growth that was expected, with month-on-month growth slowing from 0.2% to 0.1%, while year-on-year growth weakened from 1.6% to 1.4%.

This could indicate that the Bank of Canada (BOC) was overenthusiastic in hiking rates twice in the past few months, which weighed on the Canadian Dollar.

GBP CAD Exchange Rate Forecast to Weaken if Chancellor Hammond Budget Sticks with Austerity

Chancellor Philip Hammond is set to present his Budget to Parliament tomorrow. Markets will be looking for investment measures to help the UK economy thrive post-Brexit, as well as measures to help tackle the nation’s productivity problem.

However, Hammond is likely to back a continuation of austerity, which means tomorrow’s spending plans may contain little in the way of additional investment.

Sterling could therefore sink after the Budget has been delivered.

Third-quarter UK GDP is set for release on Thursday; the UK economy has been on lacklustre form so far this year, so markets will be looking for an uptick from the 0.4% growth rate recorded in the second quarter.

Canadian retail sales data for September could provide some support for the ‘Loonie’ as August’s -0.3% decline is expected to have given way to a 0.9% rise.

Monday sees a speech from Bank of England official Sir David Ramsden. The newest member of the Monetary Policy Committee (MPC) may enlighten markets as to his view on the outlook for interest rates.

Signs of caution here could weaken the Pound, while an optimistic outlook on the UK economy would raise hope that this month’s rate hike was not a lone event.

On Tuesday the Bank of Canada (BOC) Governor Stephen Poloz and his deputy Carolyn Wilkins will hold a press conference.

Hannah Wilson

Contact Hannah Wilson