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Pound Canadian Dollar (GBP/CAD) Exchange Rate Firms as Oil Prices Falter

October 19, 2021 - Written by John Cameron

Pound-to-Canadian Dollar-rate-

GBP/CAD Exchange Rate Climbs on Oil Price Downturn

The Pound Canadian Dollar (GBP/CAD) exchange rate rose today as the Canadian Dollar (CAD) fell on depreciating oil prices. Conversely, the Pound (GBP) found support on Bank of England (BoE) rate hike expectations alongside an expectation of foreign investment.

At the time of writing, GBP/CAD is trading at C$1.7046, up 0.3% from today’s opening levels.

Canadian Dollar (CAD) Slides on Oil Price Uncertainty

Having risen at a rapid pace recently, given increased demand amidst a global gas price hike, the value of WTI crude oil has now softened slightly on fears of a stunted economic recovery.

GDP data from China yesterday revealed less growth than expected – as the world’s largest economy, data from China tends to reflect the global economic situation. Additionally, significant headwinds from power shortages and the coronavirus outbreak are hindering the global supply chain.

Slowing growth was further hinted at by US factory output, which dropped 1.3% in September, the most in the seven months. The contraction is broadly attributed to Hurricane Ida.

Given signs of a slowing economic recovery, oil demand is now less predictable, influencing price dynamics. This, in turn, impacts the Canadian Dollar.

Another factor affecting CAD trading is Canada’s latest business outlook survey. While the outlook for domestic and foreign sales remains strong, more firms are facing supply-side challenges and labour shortages have intensified from last year.

Subsequently, a growing number of businesses plan to increase wages to attract workers, passing increased input costs on to their customers. As a result, firms’ inflation expectations moved up further, increasing inflation expectations amongst policymakers.

Bank of Canada (BoC) governor Tiff Macklem said last week that ‘measures of inflation are probably going to take a little longer to come back down’, inspiring trading volatility for the Canadian Dollar against its peers.

Pound (GBP) Strengthens on BoE Optimism, Foreign Investment Expectations

Ahead of inflation rate data tomorrow, rate hike expectations and comments from Bank of England (BoE) policymakers are underpinning support for the Pound, alongside hopes of significant foreign investment.

Expectations for an interest rate hike from the Bank of England (BoE) continue to find traction on comments from BoE Governor Andrew Bailey, who remarked over the weekend that ‘we, at the Bank of England, have signalled that we will have to act.’

Subsequent market optimism comes despite retaliatory comments from MPC members Catherine Mann and Silvana Tenreyro, who regard that the BoE can hold off raising interest rates because financial market traders are already betting on tighter monetary policy, increasing the cost of borrowing in financial markets.

The CME Group’s BoEWatch Tool shows investors are pricing in a 52.2% chance of a 0.25 interest rate rise before the end of the year, and 17.9% probability of a 0.5 increase. Meanwhile, the odds of remaining unchanged are 29.9%.

Also supporting Pound exchange rates, the ongoing Global Investment Summit has fuelled expectations of foreign investment in the UK’s green industries.

Domestic investments have already been secured, with a £400m partnership between the UK government and Bill Gates established to fund ‘green premium’ technologies.

Gates argues that the project will make new technologies, currently expensive and therefore less attractive to investors, commercially viable:

‘We will scale [those technologies] up and bring down that cost, so we’ll get these to the same place we are today with solar and onshore wind, and so they can be scaled up to reduce emissions.’

GBP/CAD Exchange Rate Forecast: Inflation Data to Drive Movement?

Looking ahead, tomorrow’s inflation data for both Canada and the UK is likely to drive further movement in the Pound Canadian Dollar exchange rate.

Increased Canadian inflation may exacerbate existing inflationary pressures, while a drop in UK CPI could suppress support for an early BoE rate hike.

Oil price dynamics may also influence CAD trading.

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