Pound Canadian Dollar (GBP/CAD) exchange rate climbs as BoC implies end to rate hikes
Article updated 16:10, 24/1/2024:
The Pound Canadian Dollar (GBP/CAD) exchange rate is continuing to strengthen this afternoon, following the Bank of Canada’s (BoC) interest rate decision.
The BoC acted in line with market expectations, and elected to leave rates unchanged at 5%. However, in the accompanying forward guidance, the central bank indicated that it had reached the peak of its tightening cycle.
Furthermore, the BoC stated that it was shifting its approach to considering how long rates needed to be held as they are to combat inflation.
Tiff Macklem, the Governor of the BoC, stated:
‘We did, of course, discuss where we see the economy and inflation going and what that could mean for monetary policy going forward. What came through in the deliberations is that Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.’
Furthermore, the continually risk-on market impulse likely brought further tailwinds for GBP/CAD. As the Canadian Dollar is closely tied to the safe-haven US Dollar (USD), it endured additional selling pressure as investors sought riskier assets.
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Pound Canadian Dollar (GBP/CAD) exchange rate lifted by surprise UK service sector growth
The Pound Canadian Dollar (GBP/CAD) exchange rate is strengthening this morning, amid forecast-beating UK preliminary PMIs.
At the time of writing, GBP/CAD is trading at around CA$1.7158, an increase of just over 0.4% from today’s opening rates.
Pound (GBP) boosted by surprise service sector improvement
The Pound (GBP) is rising this morning, following a surprisingly upbeat service sector PMI. In January, sector activity unexpectedly increased to 53.8, the strongest improvement in eight months.
As the key sector for the UK economy, news of continued growth is serving to lift GBP investors’ spirits. Additionally, business optimism for the year ahead strengthened which brought additional tailwinds for Sterling.
Chris Williamson, Chief Business Economist at S&P, commented:
‘Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates.’
However, this is something of a double-edged sword. Improving private sector activity could give room for the Bank of England (BoE) to keep interest rates unchanged for longer.
These pared back rate cut bets are likely bringing additional support to Sterling in the interim, with an early cut looking less likely.
Canadian Dollar (CAD) slipping as markets await BoC decision
The Canadian Dollar (CAD) is weakening this morning, as investors await the Bank of Canada’s (BoC) latest interest rate decision.
Analysts are continuing to weigh up the tone the BoC will take, as unchanged rates are something of a foregone conclusion. As such, the focus is on whether or not the bank will ease its previously hawkish demeanour.
Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, commented:
‘In determining whether to emphasize the progress on inflation excluding shelter or the stickiness in the core median and trim measures, governing council will effectively be communicating whether or not the door is open to rate cuts in upcoming months.’
As the expectation is growing for a more dovish approach, investors are dialling in bets on imminent rate cuts, denting the ‘Loonie’.
Additionally, cheery trade is piling additional pressure on CAD due to its ties to the safe-haven US Dollar (USD). With the safe-haven struggling amid the bullish mood, the Canadian Dollar is being undermined by this close-correlation.
Pound Canadian Dollar exchange rate forecast: Weak UK retail sales to dent GBP?
Looking ahead for the Pound, high-impact data releases are set to be few and far between. Because of this, the focus may be on the Confederation of British Industry’s (CBI) distributive trade data, due tomorrow.
In January, the CBI forecasts that retail sales remained downbeat but showed signs of improvement. The reading is expected to increase from -32 to -18 on a monthly basis, which may be encouraging but might not lift GBP exchange rates.
For the Canadian Dollar, the impact of the BoC’s decision will be the primary driver of movement in the short term. Due to a lack of other data releases, investors may continue to mull the BoC’s forward guidance.
Elsewhere, oil price volatility will likely play a role in shaping GBP/CAD. If prices begin to climb once more, the crude-linked ‘Loonie’ could strengthen.