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GBP CAD Exchange Rate Surges Higher After BoE Sounds Hawkish Note

February 8, 2018 - Written by Frank Davies

In the immediate aftermath of the Bank of England’s (BoE) rate decision the Pound Canadian Dollar (GBP CAD) exchange rate surged higher as market sentiment turned bullish.

Demand for the Pound picked up significantly on the back of the BoE’s meeting minutes, which proved to be slightly more hawkish in nature than anticipated.

Even though policymakers voted unanimously in favour of leaving interest rates on hold this month the odds of a May rate hike picked up substantially.

Confidence in the Canadian Dollar, meanwhile, was still hampered by the softness of the oil market and a general sense of investor risk aversion.

Hawkish BoE Message Prompts GBP CAD Exchange Rate Uptrend

The quarterly Inflation Report offered the Pound further cause for confidence, with the BoE revising its economic forecasts higher.

All in all, the message from the central bank proved positive, in spite of the persistent uncertainty of Brexit negotiations and its negative impact on domestic growth.

As Ben Brettell, senior economist at Hargreaves Lansdown, noted:

‘Firstly, the expected – a unanimous vote to leave interest rates on hold for now. The Bank raised borrowing costs for the first time in a decade in November, and as such was fully expected to wait until later this year before considering a further upward move.

‘However, the Bank upgraded its forecast for the UK economy slightly today, citing stronger global conditions. It now expects 1.8% growth this year, as against 1.6% forecast in November. Policymakers also said they will try and bring inflation back to their 2% target more quickly than previously, which means rates could rise faster and further than investors had expected. The Bank’s rhetoric echoed that of September’s meeting minutes, which preceded the November rate hike.

‘It now looks like the next rise could happen as soon as May – the next time the Bank’s economic forecasts are due to be updated. Prior to today’s announcement, markets were factoring in a 50% chance of a rate rise in May, and an 80% chance they’ll be higher by the end of the year.’

With markets now viewing a May interest rate hike as a much greater possibility the appeal of the Pound naturally improved.

However, the GBP CAD exchange rate could lose some of its regained momentum ahead of the weekend if Friday’s raft of UK trade and production data fails to impress.

On the other hand, if the visible trade deficit is found to have narrowed in December this may boost the Pound further against its rivals.

Any softening of the NIESR gross domestic product estimate for the three months to January may give investors incentive to sell out of Sterling once again, though.

Rising Canadian Unemployment Forecast to Dent CAD Exchange Rates

Fresh volatility is likely in store for the Canadian Dollar on Friday, with the release of January’s raft of labour market data.

As forecasts point towards an uptick in the Canadian unemployment rate, from 5.7% to 5.8%, the potential for CAD weakness is significant.

Loosening of the domestic labour market could well encourage the Bank of Canada (BOC) to sit on its hands for longer, rather than returning to a monetary tightening bias in the months ahead.

If an increase in unemployment is particularly driven by a decline in full-time employment this is likely to weigh heavily on the mood towards the Canadian Dollar.

However, if the Canadian labour market continues to tighten its slack the GBP CAD exchange rate could come under some degree of downside pressure.

With the oil market still in a bearish mood as rising US output erodes the impact of the OPEC-led production-limiting agreement the Canadian Dollar remains somewhat vulnerable.

As long as US crude oil inventories continue to build this is likely to keep something of a lid on CAD exchange rates, with oil prices set to retreat further back towards the US$60 per barrel mark.
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