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GBP/CAD Exchange Rate Rises after Forecast for Two 2018 UK Interest Rate Hikes

April 23, 2018 - Written by Toni Johnson

During the previous week, the Pound to Canadian Dollar exchange rate saw an overall decline due to fresh doubts about whether a May interest rate hike would occur.

The GBP/CAD exchange rate opened around 1.7973 on Monday morning last week, but closed down lower in the region of 1.7863 on Friday evening.

The Pound initially appreciated when it was reported that UK wage growth had risen above the pace of inflation in February.

Although the increase was only by 0.1%, this still meant that during the month UK consumers didn’t face a squeeze on their wages.

The underlying hope was that with the UK economy strengthening, the Bank of England (BoE) would finally throw caution to the wind and raise interest rates.

These hopes promptly collapsed a day later, when it was reported that the UK inflation rate had slowed in March.

Although it was predicted that the Pound would rally if inflation fell, the slowdown instead sparked a panic that the BoE might not raise interest rates after all.

This was down to the assumption that if the level of inflation slowed too quickly then BoE policymakers would no longer be under any pressure to consider hiking interest rates.

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Trader uncertainties weren’t helped by late-week comments from BoE Governor Mark Carney and fellow BoE member Michael Saunders.

Mr Carney initially devalued the Pound by playing down the chances of a near-term interest rate hike, while Mr Saunders enabled a late-week GBP advance with more optimistic statements.

For Canadian Dollar traders, the main data last week was the Bank of Canada (BOC) interest rate decision for April.

Policymakers left interest rates untouched at 1.25% and delivered a cautious outlook, warning about uncontrolled inflation among other factors.

Later in the week, base year-on-year inflation was reported higher in March, while retail sales growth in February did not slow by as much as expected.

GBP/CAD Exchange Rate Rises on Rising UK Interest Rate Hike Hopes



On a relatively quiet start to weekly trading, the Pound has appreciated against the Canadian Dollar thanks to the forecast that there could be four UK interest rate hikes from 2018 to 2019.

The predictions for two hikes this year and two next year have come from analysts at EY Item Club, who see hikes coming despite the recent inflation rate panic.

The assumption is that with wages rising above the rate of inflation, UK consumers will find themselves in a better position to handle the pressures imposed by higher interest rates.

CAD/GBP Exchange Rate Slides as BOC Governor Warns against Imminent Interest Rate Hike



On the other side of the pairing, the Canadian Dollar (CAD) to Pound (GBP) exchange rate has been weakened by the latest comments from Bank of Canada (BOC) Governor Stephen Poloz.

Clarifying whether the BOC will raise interest rates as soon as inflation moves beyond the bank’s target range, Mr Poloz has said:

‘What I don’t want is for people to be spending this entire year asking me what I’m up to because inflation is above target.

‘You need once in a while to remind people that there’s a range and that’s okay, the policy allows for this. We’re not violating our target in some way.

‘Some people think it’s more mechanical, and that’s fair. If inflation is going to be 2.3% or something like that, you should be raising interest rates to make it 2%’.


By stressing that higher inflation is no guarantee that interest rates will also rise, Mr Poloz has accordingly lowered confidence among CAD traders and weakened the Canadian Dollar.

GBP/CAD Forecast: Will Pound to Canadian Dollar Exchange Rate Rise Further if MPs Back Customs Union?



There could be greater Pound to Canadian Dollar gains on the way, when MPs hold a vote on if the UK should remain in a customs union after it leaves the EU.

Peers in the House of Lords have already supported this measure, but government officials have declared that the UK will leave any and all customs unions after Brexit.

If a majority of MPs support remaining in the customs union with a (non-binding) vote, then the Pound could rally on hopes for a change of the government’s stance on the matter.

Following on from his recent remarks, BOC Governor Stephen Poloz will be speaking again this week on 23rd April and 25th April.

If Mr Poloz rolls back on his previous cautious comments and hints at imminent CA interest rate hikes then the GBP/CAD exchange rate could worsen over a strengthening Canadian Dollar.
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