Pound Sterling to Canadian Dollar (GBP/CAD) Exchange Rate Struggles to Capitalise on Weaker Canadian Inflation

Sliding Canadian Inflation Fails to Boost the Pound Sterling Canadian Dollar (GBP/CAD) Exchange Rate

UPDATE: An unexpectedly sharp slowdown in the Canadian consumer price index in November failed to shore up the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate today.

Demand for the Canadian Dollar (CAD) diminished as the headline inflation rate eased from 2.4% to 1.7% on the year, falling below the Bank of Canada’s (BOC) target rate.

Even so, with the EU and UK both stepping up preparations for a no-deal Brexit scenario Pound Sterling (GBP) was unable to capitalise on the decline of its rival.

Oil Price Weakness Offers Support to Pound Sterling Canadian Dollar (GBP/CAD) Exchange Rate

As global market sentiment continued to deteriorate this left the Canadian Dollar (CAD) on the back foot this morning, dragged down by weaker oil prices.

Brent crude slumped once again, easing from US$60 to less than US$58 per barrel, as signs pointed towards a further increase in US crude production.

This limited the appeal of the commodity-correlated Canadian Dollar, especially as worries over the global growth outlook continued to mount in the face of lingering US-China trade tensions.

In the wake of Monday’s disappointingly sharp contraction in Canadian existing home sales data this helped the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate hold onto an uptrend.

With confidence in the underlying health of the Canadian economy already limited investors saw little incentive to favour the Canadian Dollar at the start of the week.

Escalation in No-Deal Brexit Preparations Limits Pound Sterling (GBP) Exchange Rate Upside

Demand for Pound Sterling (GBP) remained muted, meanwhile, as Theresa May prepared to ramp up preparations for the possibility of a no-deal Brexit.

This prompted fresh market jitters over Brexit, even though investors remain hopeful that the UK will still avoid crashing out of the EU with no deal in spite of the recent stalling in progress.

With the unpopular Withdrawal Agreement set to face a parliamentary vote, and potential defeat, in mid-January a sense of uncertainty continues to hang over the GBP/CAD exchange rate.

Anticipation ahead of tomorrow’s UK consumer price index data also put a dampener on the Pound, with forecasts pointing towards a dip in the headline inflation rate.

GBP/CAD Exchange Rate Vulnerable Ahead of UK Inflation and BoE Decision

Any softening in UK inflationary pressure would give the Bank of England (BoE) incentive to leave interest rates on hold for longer, to the detriment of GBP exchange rates.

While weaker inflation would offer a fresh boost to wage growth investors are unlikely to welcome a softer reading from the CPI.

This could weigh heavily on the GBP/CAD exchange rate ahead of Thursday’s BoE interest rate decision, with weaker inflation likely to encourage greater policymaker dovishness.

Although no change in policy is anticipated at this stage, thanks to Brexit uncertainty, the tone of policymaker commentary may drive the Pound lower across the board.

If policymakers take a more optimistic view, however, the mood towards GBP exchange rates could see improvement.

Weaker Canadian Inflation to Drag CAD Exchange Rates Lower

Further weakness may be in store for the Canadian Dollar, meanwhile, as forecasts point towards a decline in November’s Canadian CPI.

With the monthly inflation reading expected to show a contraction of -0.4% the mood of CAD exchange rates could easily sour on Wednesday afternoon.

This softening looks set to drag the headline annual inflation rate below the BoC’s 2% target once again, giving policymakers less reason to push for higher interest rates.

However, Friday’s retail sales and gross domestic product figures could offer a boost to the Canadian Dollar if growth is found to have picked back up at the start of the fourth quarter.

Hannah Wilson

Contact Hannah Wilson