Pound to Canadian Dollar (GBP/CAD) Exchange Rate Recovers after BOC Interest Rate Freeze

Cautious Outlook from Canadian Central Bank Enables GBP/CAD Exchange Rate Advance

The Pound (GBP) has regained lost ground against the Canadian Dollar (CAD) today, following a lacklustre Bank of Canada (BOC) interest rate decision.

BOC policymakers have left interest rates at 1.25% as expected, but there are no signs that an interest rate hike is on the horizon.

Cementing the cautious outlook of the BOC and pushing the GBP/CAD exchange rate higher, the bank’s minutes said;

‘Some progress has been made on the key issues, particularly the dynamics of inflation and wage growth.

‘The [BOC] will continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity.

‘In this context, [the] Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data’.

Falling Hopes of BoE Interest Rate Hike Trigger GBP/CAD Exchange Rate Decline

In an unusual turn of events, the Pound (GBP) has fallen by -0.5% against the Canadian Dollar (CAD) today on the news that UK inflation rates have fallen in March.

The readings have triggered widespread losses in Pound exchange rates, due to the assumption that a Bank of England (BoE) interest rate hike in May was now less likely.

Pound traders had initially assumed that lower inflation (coupled with a recent acceleration in wage growth) would mean that a May interest rate hike was practically guaranteed.

Since then, there has been fresh fear that if inflation slows and wage growth picks up, BoE policymakers may refrain from acting due to the economy ‘self-regulating’.

This conclusion has significantly lowered confidence among Pound traders, despite some economists still thinking that a May interest rate hike is on the table.

Will Pound to Canadian Dollar (GBP/CAD) Exchange Rate Recover on Forecast-Matching BoE Interest Rate Hike?

Among those still backing a BoE interest rate hike in the coming month has been Economist Intelligence Unit UK Analyst Danielle Haralambous, who has said:

‘Inflation was softer than expected, but the decline won’t be a complete surprise to the BoE’s policy-setting committee, which expects annual inflation to ease this year as the impact of the Pound’s past depreciation fades.

‘The committee is looking at other data showing domestic price pressure still in the pipeline, notably a pick-up in wage growth and firm input prices.

‘We expect these factors to keep inflation above the [2%] target for much of this year and support the case for a gradual normalisation of UK monetary policy.

‘In our view, there is still a high chance that the bank raises interest rates again next month’.

With a May BoE interest rate hike now not guaranteed, the Pound to Euro exchange rate could rally if the UK central bank commits to tighter monetary in the month ahead.

Canadian Dollar to Pound (CAD/GBP) Exchange Rate Advances as Oil Costs Rise on Middle East Conflict Forecast

Over in Canada, the Canadian Dollar (CAD) to Pound (GBP) exchange rate has risen by 0.5% thanks to the GBP crash as well as rising crude oil prices.

The price of crude oil, an important export for Canada, has risen sharply ever since it seemed that the US could take military action in Syria.

With the US, France and the UK having launched missile strikes, the fear of a prolonged conflict breaking out has grown, boosting oil prices in the process.

Higher crude oil prices are supportive for Canadian exporters and may rise further if oil production in the Middle East continues to be seen as at risk.

Pound to Canadian Dollar Exchange Rate Forecast: Chance of GBP/CAD Recovery on Rising Retail Activity

The Pound (GBP) has struggled against the Canadian Dollar (CAD) today, but could recover tomorrow when UK retail sales data will be released.

The stats for March are predicted to show rising annual sales activity compared to March 2017, but slower monthly sales growth compared to February 2018.

Many sectors of the UK economy struggled in March due to inclement weather, so the monthly stats may be overlooked in favour of more positive annual readings.

The next high-impact Canadian data will be out sooner, when the Bank of Canada (BOC) makes an interest rate decision this afternoon.

BOC policymakers aren’t expected to adjust rates from their current 1.25% level, but hints that rate hikes are likely in 2018 could still trigger a CAD/GBP exchange rate rally.

As such, the Pound to Canadian Dollar exchange rate (GBP/CAD) could fall further this afternoon, but make a recovery tomorrow.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon