Pound Canadian Dollar (GBP CAD) Plummets as BoC Announces Surprise Rate Hike

September 7, 2017 - Written by John Cameron

STORY LINK Pound Canadian Dollar (GBP CAD) Plummets as BoC Announces Surprise Rate Hike

The Pound to Canadian Dollar exchange rate plummeted to its lowest levels since January yesterday as the Bank of Canada (BoC) announced a surprise rate hike.

The BoC raised its key interest rate to 1.0%, less than a week after Canada’s Q2 gross domestic product (GDP) data exceeded expectations by accelerating at a pace of 4.5% (the fastest expansion they had seen in six years). The hike was an effort to adjust to the nation’s newfound economic momentum, though analysts had largely expected that the bank would hold off until the October policy meeting before pushing rates up again.
The Bank’s statement recognised that growth in Canada is ‘becoming more broadly-based self-sustaining’, with strong employment figures, income growth and indeed consumer spending all justifying the decision in the policymaker’s minds.

The Bank’s official statement concluded:

‘Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates’.
The surprise that resulted from this news was predominantly due to the weeks of silence that preceded this event, especially when prior to the previous July rate hike there were a range of statements (or ‘forward guidance) signalling that the rate move was imminent.

In this respect it also holds true to previous statements from the bank that they would be guided by data.

TD senior Economist Brian De Prattot noted:

‘If we do get things coming in extremely hot, they may react to that without necessarily needing to be super explicit in their communications strategy.’

The Pound’s recent weakness on the back of ongoing political and economic uncertainty made it an easy target for the ‘Loonie’s rally, though the climb has now steadied into Thursday.

UK House Prices Rise, GBP CAD Steadies

The data calendar remains relatively quiet for the Pound, though house prices in the UK jumped 2.6% year-on-year over the three months to August. This followed a 2.1% jump over the previous period and smashed market expectations of a 2.1% rise.

The month-on-month August figure also demonstrated a rise from 0.7% in July to 1.1%, far higher than the forecast of 0.1%.

Beyond this, the recent figures for mortgage approvals also suggest that some buoyance may be returning to the housing market, something that could, perhaps, be attributed to robust employment growth.

The Pound’s fall against the Canadian Dollar partially slowed as a result, though profit-taking has steadied the ‘Loonie’s’ rise.

ECB Meeting Puts Markets on Edge, GBP Bearish in Anticipation

Markets are now nervously awaiting the imminent European Central Bank’s (ECB) September rate decision, desperately attempting to anticipate what ECB Chief Mario Draghi will have to announce.

The Eurozone remains plagued, ironically, by the strength of the Euro, which makes exports from the Bloc less competitive and pushes levels of inflation down. Indeed, the Eurozone’s inflation continues to remain below the bank’s target, which makes the likelihood of a rate hike very unlikely.

Investors are, however, eager to see if the ECB will finally announce changes to its quantitative easing scheme (QE), the tapering of which would send demand for the Euro soaring. If this occurs then the Pound to Canadian Dollar exchange rate could see even more losses in the immediate aftermath as investors switch to the Single currency.

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