GBP CAD Shrugs Off Rising Oil Prices Ahead of BoE Rate Decision

October 30, 2017 - Written by David Woodsmith

STORY LINK GBP CAD Shrugs Off Rising Oil Prices Ahead of BoE Rate Decision

While oil prices remained on a bullish trend at the start of the week this was not enough to knock the Pound Canadian Dollar exchange rate off its uptrend.

Even with Brent crude trending above the psychologically important US$60 per barrel mark a general sense of market risk aversion kept the Canadian Dollar on a weaker footing.

Confidence in the Pound, meanwhile, continued to pick up on the back of the latest UK consumer credit and mortgage approvals figures.

As this data seemed to support the prospect of an imminent Bank of England (BoE) interest rate hike this prompted GBP exchange rates to trend higher across the board on Monday.

With markets now considering BoE action a near-certainty the downside potential of the Pound was relatively limited at the start of the week.

Resilient Canadian GDP Could Boost CAD Rates

Demand for the Canadian Dollar could pick up somewhat on Tuesday, however, if August’s gross domestic product data proves positive.

If Canada can hold onto its position as the strongest-growing member of the G7 this could encourage CAD exchange rates to rally sharply.

Even so, the generally dovish nature of recent commentary from Bank of Canada (BOC) policymakers is likely to limit any ‘Loonie’ upside in the near term.

As the BOC looks set to leave interest rates on hold for some time to come the appeal of the Canadian Dollar is somewhat limited.

Any fresh dovish commentary from BOC Governor Stephen Poloz could see the GBP CAD exchange rate make further gains on Tuesday evening, with the policymaker set to testify before the Finance Committee.

However, if the Trump administration appoints a more dovish Federal Reserve Chair this may limit the weakness of the Canadian Dollar, suggesting that the policy divergence between the BOC and Fed is unlikely to widen significantly.

Pound Volatility Likely as Markets Consider BoE Policy Outlook

A strong showing from the UK manufacturing PMI on Wednesday could give the BoE further encouragement to raise interest rates from their current record lows.

On the other hand, unless growth in the manufacturing sector disappoints significantly to the downside this is unlikely to particularly alter the case for an imminent rate hike.

Some degree of volatility is expected for the GBP CAD exchange rate ahead of Thursday’s announcement, even if the outcome looks to be something of a gone conclusion as far as investors are concerned.

Markets are likely to be more interested in the future policy outlook of the BoE, though, with the Pound set to weaken if the odds point towards any rate hike being a one-off move.

As analysts at ING noted:

‘Virtually pricing in a November hike, the market is now expecting an additional increase by next September.

‘So does the MPC still think that markets are underestimating future rate rises? The answer is probably yes. That's because, after September next year, markets only expect the Bank to hike once over the subsequent two years. We suspect the Bank would ideally like markets to have slightly more than this priced in, although, given all the various economic and political uncertainties, they may take a little more convincing.

‘But before then, the bigger question is whether or not the Bank throws in another explicit hint that rates need to rise further in "coming months". At this stage, we think the MPC will be reluctant to tie its hands too much. While we could potentially get some more positive Brexit news as we head into the new year - the concrete agreement of a transition deal and possibly the initiation of trade talks - there are still plenty of political hurdles and landmines that have to be navigated first. A lot can happen before February.’

If the BoE shows signs of greater dovishness, particularly in its latest Inflation Report, this could see the GBP CAD exchange rate ceding ground.

Any signs of weakening in Friday’s UK services PMI could also put pressure on the Pound, with the sector having already started to lose momentum in recent months.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Canadian Dollar Forecasts