GBP/CAD Exchange Rate Spikes, Dips Following 50bps Interest Rate Hike
(Updated 17:00, 22/09/2022) The Pound Canadian Dollar (GBP/CAD) exchange rate is climbing again, having peaked around midday before tumbling through this afternoon’s session. Both Sterling and the Canadian Dollar have come under pressure today, from central bank dynamics and oil price uncertainty, respectively.
The Bank of England (BoE) hiked interest rates by 50 basis points in its policy meeting today: a more dovish move than many investors expected. The Monetary Policy Committee (MPC) were divided in their approach, voting 5-3-1 in favour of a 50bps / 75bps / 25bps interest rate hike.
GBP lost support as a half-point percentage rate increase was considered less likely to curtail inflationary pressures. Nevertheless, it won’t push up the cost of variable-rate mortgages, credit cards and loans as much as a 75bps hike would have.
On the other hand, the UK economy is deemed to be in a recession despite the smaller rate hike move. Economic growth is likely to come under further pressure next summer as interest rates are expected to rise to nearly 5%: speaking to the media in July, the BoE set 5% as the threshold at which UK mortgage borrowers could no longer avoid debt distress.
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Pound Canadian Dollar Exchange Rate Firms as Investors Await Interest Rate Hike
The Pound Canadian Dollar (GBP/CAD) exchange rate is trending higher this morning ahead of the Bank of England (BoE)’s midday interest rate decision. Economists have priced in a raise of 50bps although it is believed that policymakers’ opinions will be mixed.
At the time of writing, GBP/CAD is trading at C$1.5225, up 0.3% from today’s opening levels.
Pound (GBP) Rebounds from 37-Year Low
Ahead of the BoE’s decision, the Pound (GBP) is clawing back gains against several peers this morning.
Following the Federal Reserve’s hefty 75bps interest rate hike last night, Sterling hit a 37-year low against the US Dollar (USD) – but is subsequently recouping losses as investors await today’s interest rate hike announcement.
The prospect of central bank policy divergence weighed somewhat upon GBP investors overnight: rattling markets afraid of a global recession, the Federal Reserve announced its intention to continue tightening policy aggressively.
Nevertheless, a three-quarter percentage point hike is not considered an impossibility for the BoE. Some believe the likelihood of a 75bps interest rate rise from the UK’s central bank stands at 90%; this would mark the BoE’s biggest hike since 1989.
Others are more bearish, speculating that policymakers may want to see the impact of the government’s energy price freeze before taking any drastic measures. Another option for the BoE is to start quantitative tightening by selling off government debt holdings.
If a larger hike is favoured by the central bank later today, Sterling may enjoy a knee-jerk uptrend before weakening on consumer implications. Analysts observe that households would be liable for an extra £3bn in mortgage costs if interest rates increase by 75bps.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments:
‘For anyone who is already struggling with runaway price rises, the extra cost of the mortgage could be the final straw.’
Canadian Dollar (CAD) Weakens as Oil Prices Forecast to Drop
The Canadian Dollar (CAD) is trending down this morning despite rising oil prices, as analysts predict a plunge in the price of WTI crude to below $81.00 per barrel. Such forecasts come off the back of the Fed’s trimmed growth projections.
Experts explain that economic growth in the US will come under pressure from aggressive interest rate hikes: a drop in economic growth projections will subsequently subdue oil demand.
Furthermore, a build up in oil stock inventories limits production demand. The Energy Information Administration (EIA) recently reported an increase in oil stockpiles by 1.142.
Elsewhere, ‘Loonie’ sentiment may be subdued by bearish expectations for the Bank of Canada (BoC). August’s consumer inflation data printed below forecasts, reducing pressure on the central bank to tighten interest rates in line with other countries.
Further capping CAD gains is a risk-off mood, exacerbated by fears of military aggression from Russia. Discontent is stirring in the country’s capital of Moscow as Russian forces arrest more than 1,300 people for protesting against the mobilisation of troops.
Pound Canadian Dollar Exchange Rate Forecast: BoE Policy Decision to Drive Movement
Looking ahead, the Bank of England’s interest rate decision will be the main stimulus for movement in the Pound Canadian Dollar exchange rate today.
If the central bank is hawkish, Sterling could climb C– but may subsequently dip as analysts contemplate the repercussions of higher interest rates.
Elsewhere, external factors including risk sentiment could influence trading. Improving risk sentiment may buoy CAD against safe-haven peers such as the US Dollar.