Pound Canadian Dollar (GBP/CAD) Slips as UK Recession Fears Grow
The Pound Canadian Dollar (GBP/CAD) exchange rate is slumping as UK inflation remains unchanged, bolstering expectations of further rate hikes from the Bank of England (BoE).
At time of writing, the GBP/CAD exchange rate is around $1.6801, a 0.47% plunge from this morning’s opening levels.
Pound (GBP) Undermined by Mounting Recession Fears
The Pound (GBP) is weakening substantially this morning despite hotter-than-expected inflation. Against predictions of a modest cooling to 8.5%, headline CPI surprised markets and remained at 8.7%. Despite expectations growing of the BoE to continue their aggressive rate hike cycle, fears of a looming recession appear to offset any gains.
UK inflation remains sticky and stubbornly high, as it also remains the fastest rate of any major advanced economy. Core inflation, excluding volatile food and energy prices, accelerated at the fastest rate since 1992 as it climbed from 6.8% to 7.1%. With inflation remaining far above the central bank’s target rate of 2%, the market now sees a 40% probability of a half percentage point increase. With a 60% chance that rates hit 6% by December could also preventing further losses for Sterling. Paul Dales, Chief UK Economist at Capital Economics, now believes that the BoE will raise interest rates by 50bps tomorrow, adding:
‘The problem is that the recent surge in core inflation and the re-acceleration in wage growth shows that domestic inflationary pressures are still strengthening. This suggests the Bank may have more work to do than the Fed or ECB.’
However, fears of a recession appear to be sapping demand for the Pound. If the key rate was to reach 6%, as now predicted, sky-high borrowing costs could weigh heavily on the UK and the worsening cost-of-living crisis.
Canadian Dollar (CAD) Supported by Stabilising Oil Prices
Meanwhile, the Canadian Dollar (CAD) is finding moderate strength against many of its peers this morning as oil prices appear to be finally stabilising after plummeting last week. WTI Crude Oil prices picked up to $71 a barrel, buoying the commodity-linked ‘Loonie’.
Further supporting the Canadian Dollar could be the expectation that retail sales are expected to bounce back and return to growth. After sales declining for two consecutive months, a welcome return to positive sales could boost the ‘Loonie’ on a recovering economy.
Pound Canadian Dollar Exchange Rate Forecast: BoE Interest Rate Decision to Boost the Pound?
Looking ahead, the Pound Canadian Dollar exchange rate could see the former recover if the BoE opt to deliver a hawkish rate hike. With inflation remaining far above the target rate of 2%, the central bank may have to revert to more aggressive hikes to rein in inflation. GBP investors could also be more focused on the BoE’s forward guidance. Hints at further hikes beyond tomorrow could provide support for Sterling.
Meanwhile, Canadian retail sales could provide a boost for the Canadian Dollar if data proves accurate. Elsewhere, oil price dynamics could also be a major driver in CAD movements. An improving market mood could see WTI crude price climb, and in turn support the ‘Loonie’.