5-Day Pound to Canadian Dollar Rate Outlook - Deputy Gov Tim Lane Speech and Canadian Inflation Report Ahead

September 16, 2017 - Written by John Cameron

STORY LINK 5-Day Pound to Canadian Dollar Rate Outlook - Deputy Gov Tim Lane Speech and Canadian Inflation Report Ahead

The pound to Canadian dollar exchange rate rallied to within touching distance of a one-month-high last week after the BofE caused a surge in sterling crosses.

Over the last seven days, GBP/CAD advanced from around 1.6041 to near 1.65. On Friday, GBP/CAD briefly hit a one-month-high of 1.6563.

Valentin Marinov, Head of G10 FX Strategy and his team said "domestic developments are likely to be the main driver of CAD in the week ahead. Deputy Governor Tim Lane speaks on Monday 18 September and markets will be searching for hints on how quickly the BoC intends to move after taking back the emergency accommodation put in place in 2015."

The CAD could strengthen again in the coming days if Canada’s upcoming inflation report impresses traders.

The analysts at Credit Agicole said "the BoC has mostly been driven by strong growth and the expected impact of the closure of the output gap on inflation. However, we expect incoming inflation data will also start reflecting the pass- through from a stronger CAD, perhaps as soon as the August CPI report next week. The BoC has pencilled in CPI at 1.3% in Q3 and, while small deviations of 0.1-0.2ppt probably won’t make much of a difference, a bigger miss could be problematic."

Pound Surges on Bank of England (BoE) News

Central bank news has left both the British Pound and the Canadian Dollar stronger in recent weeks.

Canadian Dollar demand has been solid since the Bank of Canada (BOC) surprisingly tightened Canadian interest rates at the beginning of September.

However, the undervalued Pound easily soared, pushing GBP/CAD much higher, in response to the Bank of England’s (BoE) September meeting minutes last week.

The BoE left UK monetary policy frozen as markets widely expected, but the tone of the bank’s meeting minutes surprised investors due to its hawkish shift.

According to the report, Britain’s economy has remained stronger than most Monetary Policy Committee (MPC) members expected. This led the BoE to indicate that UK interest rates may need to be tightened at a faster rate than markets previously expected.

This was followed by hawkish comments from BoE Governor Mark Carney on Thursday evening, who stated that the MPC is preparing for the possibility that it may need to adjust interest rates in the coming months in order to tackle resiliently strong UK inflation.

Sterling’s rally was given one more strong push on Friday, in response to comments from BoE policymaker Gertjan Vlieghe.

Vlieghe indicated that not only could the bank tighten UK monetary policy in the coming months, interest rates may need to go higher than they were before 2016’s rate cut.

Despite this apparent hawkishness however, many analysts are questioning whether the bank is serious or is simply trying to push the weak Pound higher. According to Andrew Goodwin from Oxford Economics;

‘Unless we see a decisive acceleration towards 3% [inflation], the MPC will find it hard to justify making a move given the lack of a compelling reason elsewhere. For one, there is unlikely to be a material improvement in the growth outlook for some time to come. And the potential downside risks from Brexit will continue to loom large for the foreseeable future, even if Theresa May adopts a more conciliatory tone in next Friday’s speech. So, as with several other instances in recent years, we think there is a strong chance that the MPC will again be seen to be crying wolf.’

Still, many investors are now betting on a BoE rate hike taking place as soon as November or December 2017.

Amid a lack of fresh influential Canadian data over the last week, as well as mixed appetite for risk-correlated currencies the Pound surged against the Canadian Dollar.

Retail Sales Stats Ahead

The Pound is likely to see softer movement over the next few days, as investors continue to digest the Bank of England (BoE) news.

If markets begin to feel like the Pound rally has been overdone, Sterling may shed some of its gains.

However, the British currency is overall likely to continue to see strong performance as investors await more key UK data and comments from BoE officials.

On Monday morning, BoE Governor Mark Carney will hold another speech. If he remains seemingly hawkish, GBP/CAD could hold its current highs or advance further.

Besides that, the most notable news due in the coming days includes August’s UK retail sales stats and public sector net borrowing results.

Canadian Dollar (CAD) Forecast: Canadian Inflation in Focus

While most of the coming week’s Canadian economic calendar will be relatively quiet, some highly influential data will be published on Friday.

Canada’s July retail sales and August Consumer Price Index (CPI) results will be published during Friday’s American session.

If Canadian inflation beats expectations it will boost market confidence in Canada’s economy and the recent decisions of the Bank of Canada (BOC). This would lead to stronger CAD demand too.

Other notable Canadian data due next week includes manufacturing sales on Tuesday and wholesale sales on Thursday. The ‘Loonie’ may not be highly influenced by these reports however.

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