The Pound Canadian Dollar (GBP CAD) exchange rate could claw back some of its recent losses in the near-term, depending on what stance the Bank of England (BoE) takes next week at its November rate meeting.
BoE Rate Hike Speculation Reaches Fever Pitch – GBP Outlook Strong
Speculation abounds regarding the possibility that the Monetary Policy Committee (MPC) will move to raise interest rates for the first time in a decade – especially following the recent positive UK GDP release.
Markets are now pricing in an 85% chance of a rate hike next Thursday, though a 0.25% increase will only result in the historically low figure of 0.5%; a rate that prevailed for some eight years prior.
It should be noted however that this is a cause for concern for some economists who assert that the BoE’s monetary policy prospects beyond November could remain hampered by the UK’s poor economic outlook.
Today’s Halifax October house price optimism index, for example, which fell to 30 points from the previous period’s 44 (the poorest reading since December 2012) effectively adds another probable concern for the BoE as they decide monetary policy in the coming months.
RBC Currency Strategist Adam Cole echoed this when discussing future monetary policy for the BoE:
‘The main question for GBP is what happens to expectations for rates beyond November. Our economists have just reiterated their view… that November’s hike will be the only move in 2017/2018’.
In this respect, the near-term outlook for the Pound is good, as a November rate hike will, nonetheless, drive demand for Sterling even higher. Whether this will continue into next year, however, is highly questionable.
Bank of Canada Proves Cautious, CAD Exchange Rates Liable to Remain Low
The ‘Loonie’ fell sharply on Wednesday when the Bank of Canada (BoC) announced that it will be keeping interest rates on hold following two consecutive hikes since July.
The outlook for the CAD diminished greatly on this news, with the central bank also warning that whilst it intends on sticking to its rate-hike plans, it intends on doing so at a cautious pace.
One of the primary reasons that the central bank has chosen to remain cautious is their worry that inflation remains continually low, and that a rate hike would propel the ‘Loonie’ and further prevent inflation from rising.
This is reflected in the BoC projecting that inflation will rise only to 2% in the second half of 2018 – ‘a little later than anticipated in July because of the recent strength in the Canadian Dollar’ according to the bank.
Ultimately this severely limits the upward potential of the Canadian Dollar, with a hawkish fed and a hawkish BoE making the US Dollar and the Pound the more attractive near-term prospects.
Crude Oil Hits 27-Month High – CAD Could find Support
Brent crude oil prices soared to a 27-month high on Thursday, with the market becoming increasingly focused on comments from Saudi Arabia regarding their potential to end the global oil glut.
Rob Thummel, a Portfolio Manager at Tortoise Capital Advisors shared his thoughts:
‘When you couple what Mohammed Bin Salam said along with Vladimir Putin, you have to realise we have two of the largest oil producers basically putting a blessing on an extension of production cuts through the end of 2018’,
Beyond this, oil prices are likely to continue to be supported by Saudi Arabia’s overall bullish stance combined with the ongoing geopolitical tensions in the Middle East, especially with the significant sanctions levied against Qatar.
This news means that the ‘Loonie’ could potentially find some support if prices do indeed remain high – with crude oil being Canada’s primary export.
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