Wednesday saw the Bank of Canada (BOC) hike Canadian interest rates for the first time in seven years, justifying recent market excitement surrounding the ‘Loonie’ and leaving the GBP CAD outlook lower.
GBP CAD began this week trending at the level of 1.6595. After brief rises above the level of 1.6650 earlier in the week, GBP CAD dropped to a new multi-month-low of 1.6525 on Wednesday afternoon.
Pound (GBP) Mixed after UK Wage Growth Beats Expectations
Sterling has been volatile this week, as Bank of England (BoE) tightening bets fade but the latest UK job market results beat expectations.
The biggest focus for Pound traders on Wednesday was Britain’s May wage growth report. Wages excluding bonus were expected to rise from 1.8% to 1.9%, but instead climbed to 2%.
The report did indeed confirm that real wages dropped as expected, with wage growth unable to keep up with surging UK inflation.
However, as wages were slightly better than analysts projected, investor hopes for UK economic stability improved slightly.
Britain’s May unemployment rate impressed, unexpectedly improving from 4.6% to 4.5%. Jobless claims were lower in June than expected too.
Ultimately though, the Pound outlook is lower this week. Domestic data has indicated that Britain’s economy will likely slow later in the year, dampening hopes that cautious Bank of England (BoE) policymakers could take more hawkish tones any time soon.
BoE Deputy Governor of Monetary Policy Ben Broadbent was the latest policymaker to take a dovish stance this week, stating he was not ready to vote for higher UK interest rates.
The Pound outlook is unlikely to see further shifts this week. The next big focus for GBP investors will be next Tuesday’s UK Consumer Price Index (CPI) results for June.
If inflation is higher than expected, investors could once again firm on Sterling as they wait for the Bank of England’s (BoE) reaction.
Bank of Canada (BOC) Hikes Interest Rates and Canadian Dollar (CAD) Soars
In the space of just a month, markets have gone from not expecting any action from the Bank of Canada (BOC) in the short to mid-term future, to reacting to the first BOC interest rate hike in around seven years.
BOC rate hike bets surged in recent weeks due to hawkish forward guidance from Governor Stephen Poloz. The Canadian Dollar has seen strong performance in recent weeks as investors priced in rate hike bets.
The Canadian Dollar saw yet another surge in demand on Wednesday afternoon when the Bank of Canada hiked Canadian interest rates from 0.5% to 0.75% as speculated.
This was the first action from the bank at all since policy was last loosened in 2015.
According to the bank’s policy decision statement;
‘Recent data have bolstered the bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary.’
Poloz has recently indicated he believes inflation will see a strong uptrend in the first half of 2018. As a result, the long-term Canadian Dollar outlook will depend on developments in inflation.
Even if inflation disappoints again in the coming months however, analysts believe that higher interest rates in the US will support and insulate the Bank of Canada’s decision, limiting the downside risks in Canadian Dollar trade.
GBP CAD Interbank Rate
At the time of writing this article, the Pound to Canadian Dollar exchange rate trended in the region of 1.6515. The Canadian Dollar to Pound exchange rate traded at around 0.6050.
Comments are closed.