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GBP CAD Exchange Rate Slumps Sharply as BoE Lowers UK Growth Forecasts

May 10, 2018 - Written by Frank Davies

In the wake of the Bank of England’s (BoE) May policy meeting the Pound Canadian Dollar (GBP/CAD) exchange rate came under significant pressure.

While markets had already effectively ruled out the prospect of an interest rate hike the Pound still came under fire after the Monetary Policy Committee (MPC) voted to leave policy unchanged.

Confidence in the Pound was further dented by the downward revisions to the BoE’s growth forecasts, even though policymakers still sounded an optimistic note on the domestic outlook.

Canadian Dollar exchange rates, meanwhile, continued to draw support from the relative bullishness of the oil markets and the prospect of reduced Iranian crude supplies.

Dovish BoE Growth Forecasts Weigh Heavily on Pound Exchange Rates

Even though two BoE policymakers voted in favour of an immediate interest rate hike this was not enough to prevent GBP exchange rates sliding lower on Thursday.

Investors were disappointed that the BoE had stepped back from tightening monetary policy once again, although the recent weaker-than-expected first quarter UK data encouraged this lack of action.

As the Bank now sees inflation clocking in at just 1.4% in 2018, as opposed to the 1.8% growth forecast in February, this encouraged investors to pile out of the Pound.

With the domestic outlook look rather muted, in part thanks to the continuing drag of Brexit uncertainty, the prospect of another interest rate hike remains somewhat fragile.

However, this GBP sell-off could prove overdone, as James Smith, Developed Markets Economist at ING, commented:

‘Reading through the statement, we suspect this is a bit of an overreaction. The Bank is keen to emphasise that it thinks the weaker growth will prove to be temporary – and interestingly, that the initial estimate of 1Q GDP has been wildly underestimated. The latest forecasts assume an upward revision from 0.1% to 0.3% QoQ.

‘It also remains upbeat on the outlook for wage growth. Although it has nudged down its forecast to 2.75% for this year, it appears satisfied that the tight jobs market is translating into higher pay.

‘Importantly, the Bank still feels that further “ongoing” tightening would be “appropriate”, and all of this makes us think that policymakers still have a preference to hike in August if the data allows them to.’

As the initial reaction of markets calms the Pound could rally, with technical resistance likely to limit the downside potential of GBP exchange rates.

Even so, in the absence of any fresh UK data the GBP/CAD exchange rate could still struggle to gain significant traction ahead of the weekend.

Weaker Canadian Employment Data May Support Pound Canadian Dollar Exchange Rate

Although the Canadian new housing price index proved rather lacklustre, with prices stagnating on the month, this failed to particularly diminish the appeal of the Canadian Dollar.

Investors largely shrugged off this underwhelming domestic data thanks to the persistent strength of the oil market.

With global supply looking set to diminish further as a result of the US re-imposing sanctions on Iran the mood towards the commodity-correlated Canadian Dollar remains generally positive.

Nevertheless, the GBP/CAD exchange rate could find a rallying point on Friday afternoon if April’s raft of Canadian jobs and wage data fails to impress.

While forecasts point towards the unemployment rate holding steady at 5.8% the Canadian Dollar could come under pressure if employment levels fall.

Any decline in full time employment may give investors incentive to pile out of CAD exchange rates, as a looser labour market would encourage the Bank of Canada (BOC) to remain on hold for longer.

However, if hourly earnings are found to have picked up in April this is likely to weigh heavily on the GBP/CAD exchange rate ahead of the weekend.

Rising wages could give the BOC incentive to adopt a more optimistic policy outlook over the coming months, although it would take more than one stronger showing to boost the odds of any imminent policy action.

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