Pound Canadian Dollar (GBP/CAD) Exchange Rate Rallies despite Rumours of New Covid Restrictions
(Updated 16:00, 08/12/21) The Pound Canadian Dollar (GBP/CAD) exchange rate fell to its worst level since October 2019 today amid reports that the UK government will activate its Plan B of winter Covid measures. However, GBP/CAD has since recovered following the Bank of Canada’s (BoC) interest rate decision.
Downing Street is increasingly worried about the new Omicron variant, which appears to be more transmissible than the Delta variant. It also seems to be able to reinfect people who might otherwise be immune. Although early data suggests Omicron causes milder symptoms, high infection rates could still risk overwhelming the NHS.
The reports come as the government is facing questions over allegations of a Christmas party and a leaving do held at No. 10 while London was in lockdown.
Some have said that if the government does introduce new Covid rules it will merely be a ‘dead cat’ to distract from the Christmas party scandal. MPs and health officials are also worried that the public will be less inclined to obey Covid restrictions if they perceive the government as flouting those same laws.
GBP investors therefore seem concerned about the political, economical and medical implications of the UK’s current situation. As a result, GBP/CAD plummeted to CA$1.665, its lowest level in over two years.
However, the pair has since been able to recover the day’s losses.
The BoC decided to keep its interest rate unchanged at 0.25%, as markets expected. But the bank’s forward guidance was less hawkish than investors had hoped. The BoC stuck to its previous forward guidance that it wouldn’t hike rates until the economic recovery was complete. It maintained its October projection that this wouldn’t happen until the ‘middle quarters’ of 2022.
Following strong economic data, CAD investors were hoping for hints of a rate hike in Q1 of 2022. Therefore they found the bank’s commentary disappointing.
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Pound Canadian Dollar (GBP/CAD) Exchange Rate Softens in Absence of UK Data
The Pound Canadian Dollar (GBP/CAD) exchange rate continues to trend downwards today, with the pair currently trading at a fresh one-year low.
The movement comes as the oil-linked Canadian Dollar (CAD) enjoys rallying crude prices and strong economic data ahead of the Bank of Canada’s (BoC) interest rate decision this afternoon.
Canadian Dollar (CAD) Edges Higher ahead of BoC Decision
The Canadian Dollar is continuing to edge higher against the Pound (GBP) this morning as investors await the BoC’s decision later today.
Economists expect the bank to leave interest rates unchanged amid the uncertainty of the new Omicron Covid variant. However, the bank has already ended its bond-buying programme and signalled that interest rates could rise earlier than initially anticipated.
Since the bank’s last meeting, Canada has enjoyed some stellar economic data. Canadian inflation rose to its highest level since February 2003, with economists no longer believing it is transitory. In addition, employment has surpassed pre-pandemic levels. On Friday, Canada’s unemployment rate fell from 6.7% to 6%, far better than forecasts of a 0.1 percentage point drop.
More recently, yesterday’s balance of trade report showed stronger-than-expected growth in both exports and imports, with the country’s trade surplus widening to CA$2.1bn.
As a result, traders are expecting an imminent rate hike from the central bank. Markets have priced in a 25% chance of a rate rise today which increases to over 50% for a January rate hike.
CAD investors will be paying close attention to the bank’s communications following the meeting to try and gauge exactly when they can expect borrowing costs to increase.
Pound (GBP) Muted amid Lack of Data
Meanwhile, the Pound is subdued today as a lack of UK data leaves GBP investors without much impetus.
Sterling has also lost a key tailwind since the emergence of the Omicron variant, with a December rate hike looking unlikely. Multiple Bank of England (BoE) officials have suggested that the latest strain of the virus could delay an interest rate rise, including Michael Saunders, who voted to hike rates last month.
In addition, the UK’s infection rate continues to rise. So far Britain has recorded 437 confirmed Omicron cases. Therefore, GBP movement is muted this morning.
GBP/CAD Exchange Rate Forecast: BoC Decision in Focus
For the GBP/CAD pair, all eyes are on the BoC decision. If the bank hints at an accelerated approach to tightening monetary policy, the Canadian Dollar could push even higher against the Pound.
Turning to Sterling, GBP could get a small boost from some positive Brexit news. Reports suggest that the UK will today attempt to resolve the Anglo-French fishing row by promising to issue new licenses to French fishers. If this manages to end the rancorous dispute between London and Paris, the Pound could catch some bids.