- Pound recovered ground after BoE held rates for 85th consecutive month
- Oil volatility dictated direction of Canadian Dollar trends
- Lower US inflation dented odds of imminent Fed rate hike
- GBP/USD forecast to weaken on higher US confidence index
Pound Sterling (GBP) Exchange Rate Recovered After BoE Meeting Minutes
Although markets had not anticipated any particular change in outlook from the Bank of England (BoE) at its April policy meeting, the result still met with dovish reaction from investors. The decision to leave interest rates on hold at 0.5% marked more than seven years of loose monetary policy, prompting some greater consternation from traders who wished to see rates begin to pick up imminently. As a result the Pound (GBP) slumped sharply across the board, with motivation for traders to buy back into the softer currency limited.
Of particular note in the Monetary Policy Committee’s (MPC) meeting minutes were renewed cautions over the negative impact that ‘Brexit’ uncertainty is expected to have on the domestic economy in the coming months. The minutes note:
‘There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including on capital expenditure and commercial property transactions, are being postponed pending the outcome of the vote.’
However, while some economists had suggested that one or even two dovish members of the MPC could vote for a rate cut at this juncture the vote remained unanimous. This offered some encouragement that, barring a ‘Leave’ campaign victory, the BoE could still be on track to tighten monetary policy before the end of the year. As suggestions of a November rate hike are rather more reassuring than forecasts of low interest rates persisting until 2020, this allowed Sterling to recover some ground, with markets somewhat re-evaluating their initial reactions.
Hopes of Oil Production Deal Muted as Canadian Dollar (CAD) Softened
Confidence in the Canadian Dollar (CAD), on the other hand, was strongly shored up by the Bank of Canada’s (BOC) decision to leave interest rates unchanged on Wednesday. The more optimistic tone of policymakers pushed the ‘Loonie’ into an uptrend against the majors, with high hopes for the supportive measures set out in the recent federal budget. As this seemed to decrease the chances of the BOC opting to loosen policy in the near future the Canadian Dollar was inclined to remain on stronger form.
Brent crude was also on a bullish run this week, pushing back above the US$44 per barrel mark as speculation grew over the likelihood of oil producers agreeing a production freeze at a meeting in Doha over the weekend. However, as a positive conclusion is far from assured markets have remained somewhat jittery. As US crude inventories also grew further than anticipated in the last week the price of oil has struggled to maintain its gains.
A steady New Housing Price Index helped to support the ‘Loonie’, with risk appetite also shored up by the news that China’s first quarter GDP had slowed in line with expectations. There are hopes that the slowdown of the world’s second largest economy is beginning to bottom out, which could in turn see an increase in demand for commodities.
US Dollar (USD) Weakened as Disappointing CPI Lowers Odds of April Rate Hike
After making some strong gains on the back of bets that the Fed could raise interest rates as soon as April, the US Dollar (USD) faltered a little due to Thursday’s US CPI report. Where investors had expected to see a slight uptrend in domestic inflation they were instead greeted with a minor decline, as the CPI printed at 0.9% rather than 1.1% on the year. Although this seemed to put a severe dampener on hopes of imminent action from the Fed the US Dollar initially held its ground, before starting to retreat. As researchers at ANZ commented:
‘The CPI report overnight did not look to provide the smoking gun that some were looking for to posit the Fed is behind the curve, with 10 year Treasury yields still parked below 1.80% and with current market odds for a June rate hike at just 17%, and hike odds at just over 50% by the end of the year.’
Demand for the ‘Greenback’ could nevertheless pick up once again in response to the University of Michigan Confidence Index for April. Expectations are for a healthy uptick in domestic sentiment from 91 to 92, a result which may encourage renewed speculation over the outlook of the Federal Open Market Committee (FOMC). However, if confidence fails to improve then the Pound Sterling to US Dollar (GBP/USD) exchange rate could extend its gains further.
Current GBP, CAD, USD Exchange Rates
At the time of writing, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate was trending higher at 1.8182, while the Pound Sterling to US Dollar (GBP/USD) pairing was making gains around 1.4173. Meanwhile the Canadian Dollar to US Dollar (CAD/USD) exchange rate was on an uptrend in the region of 0.7791.