October 25, 2023 - Written by David Woodsmith
STORY LINK Pound to Canadian Dollar 2024 Outlook: 1.65 in Two Months say CIBC
GBP/CAD Exchange Rate Rally Stalls Ahead of Bank of Canada Policy Decision
An easing of geo-political tensions and rebound in risk appetite during Monday helped boost the Pound in global markets and the Canadian dollar lost ground.
The Pound to Canadian dollar (GBP/CAD) exchange rate strengthened to 5-week highs close to 1.6800 in early Europe on Tuesday.
European currencies were put back on the defensive after another round of poor PMI business confidence data and GBP/CAD retreated to near 1.6730.
MUFG maintains a bearish stance and it recommends selling GBP/CAD at 1.6630 with a target of 1.6250.
Immediate attention will focus on the October 25th Bank of Canada (BoC) policy decision.
HSBC expects that the BoC will leave interest rates on hold at 5.00%, especially with evidence of weakening consumer demand and on-going adjustments in the housing sector, but also considers that the decision is finely balanced.
It also notes that there has been generally hawkish rhetoric from Bank of Canada officials.
According to HSBC; “Recent comments by Governor Tiff Macklem and Deputy Governor Sharon Kozicki, indicate a willingness to raise the policy rate if needed until conditions are in place to bring inflation all the way back to 2%.
It added; “This week’s outcome seems more finely balanced than the market would suggest, so a hawkish hold could see the CAD capitalise.”
Goldman Sachs notes that the Canadian macroeconomic developments have been broadly dovish over the past week.
It notes that the Business Outlook Survey stressed slowing demand and weaker activity across a range of activities. There was still a strong rate of increase in prices, but Goldman considers that the overall tone was notably dovish.
The latest inflation data also weaker than expected with the headline rate declining to 3.8% from 4.0%. There were also declines in core inflation readings.
According to the bank; “On average the BoC’s preferred measures of core inflation remain elevated, but collectively this news will most likely convince the BoC to keep rates on hold.”
Following the inflation data, money markets cut the potential for a rate hike to less than 15% from over 40% earlier in the month.
The Bank of Canada outlook and guidance will be watched closely.
According to ING; “Slower-than-expected inflation, a clouded growth outlook and higher bond yields mean the BoC is likely to overlook jobs tightness and keep rates on hold on 25 October. There is still all the interest in keeping a higher-for-longer narrative alive, but markets may start to shed some doubts on it.”
Royce Mendes, head of macro strategy at Desjardins Group expects hawkish forward guidance; "Policymakers don't want to see the market price in rate cuts again in early 2024. Macklem will need to sound sufficiently hawkish to retain current market pricing, which more or less has the Bank of Canada holding rates steady until 2025."
The Canadian dollar will still be influenced strongly by geo-political considerations and energy prices
Goldman added; “we maintain that rising oil prices and further US outperformance should reinforce CAD strength on crosses over time.”
The UK PMI manufacturing index recovered to 45.2 from 44.3 the previous month and above consensus forecasts of 44.7, although the sector has still been in contraction territory below 50.0 since August 2022.
The services-sector index declined marginally to a 9-month low of 49.2 from 49.3, in line with market expectations.
Manufacturers cut prices, but service providers raised prices at a faster rate on the month as companies looked to restore margins.
Neil Birrell, chief investment officer at Premier Miton commented; "It’s hard to believe that sticky inflation and higher interest rates won’t have more impact on the surprisingly robust economy. Focus is now all on the upcoming round of central bank policy decisions."
MUFG noted Pound risks from any fresh surge in oil prices; “The CAD outperformed last year after the Ukraine conflict started when the price of oil traded above USD100/barrel. In contrast, it would represent a negative shock for the UK economy and GBP.”
CIBC expects GBP/CAD to trade at 1.65 at the end of 2023.
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TAGS: Pound Canadian Dollar Forecasts