- BOC Governor warned of weaker second quarter growth due to wildfires – ‘Loonie’ dipped against rivals as risk appetite declined
- Brexit warning from BoE encouraged Pound demand – Investors optimistic that intervention could rally ‘Remain’ vote
- GBP/CAD exchange rate forecast to benefit from weaker Canadian inflation – CPI measure predicted to have softened in May
- Referendum speculation eases after campaign activity suspended – Pound offered tentative support ahead of weekend
With forecasts pointing towards a weakening in Canadian inflation the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate extended its gains on Friday, despite an uptick in oil prices.
Fed and BOC Commentary Prompted Canadian Dollar (CAD) Slump
In the wake of the June Federal Open Market Committee (FOMC) policy meeting demand for the Canadian Dollar (CAD) weakened sharply. Although the Fed did not raise interest rates, in line with market expectations, this did not prevent a sharp surge in safe-haven demand. Investors were spooked by the more dovish tone of policymakers’ commentary, as negative global risks to domestic growth were highlighted once again. Thus, in spite of the threat of an imminent Federal Reserve rate hike seeming to weaken, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate trended higher.
Comments from Bank of Canada (BOC) Governor Stephen Poloz added further downside pressure to the ‘Loonie’ on Thursday. Poloz indicated that the impact of the Alberta wildfires was likely to shave 1.00-1.25 percentage points off annualised GDP growth in the second quarter, a dovish signal that saw investors continue to sell out of the Canadian Dollar. Although the policymaker also expressed confidence in the domestic economy seeing a rebound in growth before the end of the year this failed to particularly ease the bearish mood of markets. With little in the way of encouragement this consequently saw the price of Brent crude fall back below the US$48 per barrel mark.
Pound (GBP) Strengthens Against Rivals after BoE Brexit Warning
Markets did not anticipate any change in policy from the Bank of England (BoE) yesterday, with the unanimous vote to leave interest rates unchanged thus doing little to weaken the appeal of the Pound (GBP). In fact investors appeared to be of a generally more optimistic mood towards Sterling, with better-than-expected May Retail Sales figures encouraging confidence in the UK tender. Although the Monetary Policy Committee (MPC) did not shy away from expressing concerns over the potential negative impact it sees stemming from a vote to leave the UK this was seen to boost demand for the Pound. There was hope that this warning could prompt voters to swing towards the ‘Remain’ campaign, given the influence that BoE Governor Mark Carney is purported to have with undecided voters.
However, as analysts from Danske Bank noted:
‘The BoE repeated that “whatever the outcome of the referendum, the MPC would use its tools to achieve its inflation remit”. The latter we interpret as a sign that the BoE is ready to ease monetary policy if necessary.’
The GBP/CAD exchange rate maintained its ensuing uptrend on Friday morning, in spite of there being no fresh UK data to shore up further support for the Pound. Some of this strength could be attributed to a similar lack of activity from the EU referendum campaign, which was suspended in response to the death of Jo Cox, Labour MP for Batley and Spen.
GBP/CAD Exchange Rate Forecast: Weaker Canadian Inflation Predicted to Soften ‘Loonie’
Markets anticipate that this afternoon’s Canadian Consumer Price Index report will show a slight easing in domestic inflationary pressure. Inflation is forecast to have fallen back from 1.7% to 1.6% on the year in May, a bearish signal that could weaken confidence in the Canadian economy once again. Softer inflation would seem to indicate that the BOC’s current neutral outlook on monetary policy could be inappropriate, particularly if other signs of weakness in domestic growth materialise in coming days.
If investors remain in a generally risk-off mentality ahead of the weekend, in spite of Brent crude staging a modest comeback, the GBP/CAD exchange rate is expected to remain on a stronger footing. The Pound is also likely to continue benefitting in the absence of particular Brexit-based speculation. Nevertheless, further Sterling volatility should be expected over the next week due to the persistent uncertainty of the referendum vote.
Current GBP, CAD Exchange Rates
At the time of writing, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate was trending higher around 1.8479, Canadian Dollar to Pound Sterling (CAD/GBP) pairing was slumped around 0.5406.