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Could Dovish BOC Comments Prompt Pound Canadian Dollar Exchange Rate Rally?

Oil Price

Strong UK inflation and retail sales data failed to keep the Pound on a bullish trend ahead of the weekend.

Markets had speculated that higher-than-expected inflationary pressure could encourage the Bank of England (BoE) to raise interest rates sooner.

However, commentary from policymakers continued to point towards the BoE maintaining a neutral outlook for the foreseeable future.

As analysts at BBH noted:

‘We continue to believe that markets are overestimating the capacity of the BOE to tighten this year.  Carney has been very steadfast in his belief that the bank’s current accommodative stance is appropriate, and we do not think that will change until the impact of actual Brexit is better known.’

Confidence in the Pound has generally weakened as the formal triggering of Article 40 approaches, with the outcome of the two-year negotiating period far from clear.

The question of a second Scottish independence referendum is also likely to limit the upside potential of GBP exchange rates in the near term.

Although Theresa May has stated her intention to oppose any referendum prior to the end of Brexit negotiations the matter is still far from resolved.

Domestic political tensions, coupled with the government’s hard line of rhetoric on Brexit itself, could keep the GBP CAD exchange rate on a generally bearish trend.

However, the Canadian Dollar came under pressure from signs that the global oil supply glut could persist for some time to come.

While the Canadian economy has been shifting away from its reliance on the oil industry the ‘Loonie’ nevertheless remains correlated to the oil market.

Dovish rhetoric from a Bank of Canada (BOC) policymaker also weighed on the Canadian Dollar, in spite of signs that the Federal Reserve will pursue a slower pace of tightening.

Even so, an unexpected dip in February’s inflation rate was not enough to boost the GBP CAD exchange rate on Friday.

Although this disappointing showing will not encourage the BOC to adopt a more positive view on monetary policy the ‘Loonie’ remained relatively unchanged.

Pressure on the Canadian Dollar could increase in response to commentary from BOC Governor Stephen Poloz, however, who is due to speak on Tuesday.

If Poloz echoes the more cautious tone of his colleague then the GBP CAD exchange rate could trend higher, with speculation over the Bank’s next policy move likely to intensify.

Also in focus in the coming week will be gross domestic product reports for the UK and Canada, which could trigger further volatility for the pairing.

Should Canadian growth disappoint this could see the odds of a dovish move from the BOC increase, to the detriment of the Canadian Dollar.

Current GBP CAD Interbank Exchange Rates

At the time of writing, the Pound Canadian Dollar exchange rate was slumped in the region of 1.66. Meanwhile, the Canadian Dollar Pound exchange rate was making gains in the region of 0.59.