GBP to CAD Exchange Rate Rebounds from 3-Week-Low Following Wednesday Plunge

October 25, 2018 - Written by Minesh Chaudhari

STORY LINK GBP to CAD Exchange Rate Rebounds from 3-Week-Low Following Wednesday Plunge

Following the Bank of Canada’s (BoC) October policy decision on Wednesday, the Canadian Dollar saw a surge in demand. While the British Pound to Canadian Dollar (GBP/CAD) exchange rate has recovered from Wednesday’s lowest level, it is still on track to see significant losses throughout the week.

Since opening this week at the level of 1.7100, GBP/CAD has largely trended with a downside bias. On Wednesday alone, GBP/CAD fell almost two cents due to the Canadian Dollar’s surge. GBP/CAD briefly hit a three week low of 1.6731 on Wednesday afternoon before rebounding slightly. GBP/CAD currently trends closer to the level of 1.6800.

GBP Avoids Worst Levels as UK Prime Minister Theresa May Avoids Leadership Challenge for Now

The Pound rebounded just slightly on Wednesday evening and Thursday morning, as investors digested what seemed to be a generally positive reaction from the Conservative Party to UK Prime Minister Theresa May’s latest speech.

Analysts had been highly concerned that Prime Minister May could face a leadership challenge if this week’s 1922 Committee meeting did not go well.

In the end though, it appeared that May’s speech to the 1922 Committee went well, with May winning over most of the Conservative Party audience according to her allies.

The reaction lightened market fears that Theresa May could be about to face a leadership challenge from hard Brexit supporting backbenchers in the Conservative Party.

However, while leadership challenge concerns lightened slightly, other factors continued to weigh on the Pound and limited its recovery against the Canadian Dollar.

UK Prime Minister Theresa May has also reportedly set a date to begin preparations for a worst-case scenario ‘no-deal Brexit’, in the event that no UK-EU Brexit deal has been reached by the second week of November.

The possibility that a ‘no-deal Brexit’ could become reality has been one of the biggest factors weighing on the Pound in recent months, and unless it evaporates and a deal is reached the Pound’s potential for gains is low.

CAD Surges as Bank of Canada (BoC) Takes Surprisingly Hawkish Tone

While markets were widely expecting the Bank of Canada (BoC) to hike Canada’s interest rates during its October policy decision on Wednesday, the hawkish shift in tone the bank took was a surprise that led to a much stronger Canadian Dollar.

The bank indicated that it may speed up the pace of upcoming interest rate hikes, dropping the mention of a gradual tightening pace from its monetary policy statement. This was due to Canada’s economy running at near full capacity without need for further stimulus.

Bank of Canada Governor Stephen Poloz said:

‘The economy is running at its capacity and it is no longer needing stimulus. And so it’s our job to prevent the thing from overheating and creating inflation pressures down the road,’

The bank was also optimistic about the formation of the new US-Canada trade deal, overall taking a very hawkish tone.

According to Derek Holt from Scotiabank:

‘They are teeing up another run at it in December ... They are signaling a more urgent sense that they have to get up to neutral quicker than the markets were pricing’

With the BoC outlook potentially more hawkish than investors expected, the Canadian Dollar outlook has notable risen, causing this week’s most notable GBP/CAD movement.

GBP/CAD Forecast: Further Losses Ahead if Brexit Jitters Persist

The Pound to Canadian Dollar exchange rate is unlikely to be driven by data in the coming sessions.

Unless there is a political development strengthening the Pound or weakening the Canadian Dollar, the Pound to Canadian Dollar exchange rate is unlikely to recover this week’s losses.

A major Brexit development, such as a UK-EU agreement on how to handle Ireland’s border, or a completed withdrawal deal, are the only things that could really cause a surge in Pound demand.

The Canadian Dollar could weaken if safe haven demand surges, or if there are any signs that US-Canada political relations are worsening again.

Failing that though, the Canadian Dollar is likely to hold most of this week’s gains as investors digest the Bank of Canada’s (BoC) rising hawkishness.

Looking ahead to next week, Canada’s August Gross Domestic Product (GDP) results will be published and the Bank of England (BoE) will hold its November policy decision.

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TAGS: Pound Canadian Dollar Forecasts