Steady UK Inflation Boosts Pound Canadian Dollar (GBP/CAD) Exchange Rate as Markets Forecast BoE Rate Hike

Hawkish BoE Outlook Benefits Pound Canadian Dollar (GBP/CAD) Exchange Rate

Unexpectedly hawkish comments from the Bank of England (BoE) helped to drive the Pound Canadian Dollar (GBP/CAD) exchange rate higher on Thursday last week.

While the Monetary Policy Committee (MPC) opted to leave interest rates on hold by unanimous vote the tone of the accompanying minutes and quarterly Inflation Report proved rather more encouraging.

As the Bank raised its growth forecasts this encouraged bets that policymakers are likely to hike interest rates again in the coming months, potentially as soon as May.

However, the Pound (GBP) struggled to hold onto its bullish trend for long thanks to the latest developments surrounding Brexit.

Comments from chief EU negotiator Michel Barnier prompted the GBP/CAD exchange rate to reverse its gains on Friday, as he noted that a transition deal is still ‘not a given’.

Canadian Dollar (CAD) Exchange Rates Slumped on Rising Canadian Unemployment

The mood towards the Canadian Dollar (CAD) soured significantly ahead of the weekend, however, limiting the downside pressure on the GBP/CAD exchange rate.

Although forecasts had pointed towards an uptick in January’s Canadian unemployment rate the figure ultimately saw a sharper increase than anticipated.

This prompted investors to pile out of the Canadian Dollar during trade on Friday, further undermining confidence in the outlook of the domestic economy.

Even though the unemployment rate jumping to 5.9% was largely driven by a decline in part time employment this was not enough to mitigate the negative impact on CAD exchange rates.

With oil prices also under pressure as a result of OPEC’s latest forecasts, which see US production ramping up further over the course of 2018, CAD has seen little cause for confidence.

Markets Forecast May BoE Rate Hike as UK Inflation Holds at 3%

As the UK consumer price index held steady at 3% in January this helped to shore up the GBP/CAD exchange rate once again.

Investors were encouraged by inflationary pressure running markedly above the BoE’s 2% target, increasing the odds of another interest rate hike coming sooner rather than later.

An uptick in January’s retail sales data could extend Sterling’s gains further on Friday, given that high levels of consumer spending have been a major driver of UK economic growth since the Brexit vote.

However, Brexit-based jitters remain a significant headwind for the Pound in the near term, with markets still awaiting greater clarity over the government’s approach to the issue.

Impact of Weaker Oil Prices on GBP/CAD Exchange Rate Forecast to Ease

With global stock markets picking back up in the wake of last week’s slump, the upside potential of the GBP/CAD exchange rate could still be limited.

While the pressure on oil prices is unlikely to ease in the absence of any meaningful drop in US crude inventories this is unlikely to drive the Canadian Dollar much lower.

Another solid reading from the latest Canadian existing home sales data could also offer support to CAD exchange rates, even if confidence in the wider economic outlook remains limp.

However, as forecasts point towards a significant slowing in December’s manufacturing sales figures the Canadian Dollar may still struggle to find a stronger footing this week.

Hannah Wilson

Contact Hannah Wilson