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GBP/CAD Outlook: Pound Sterling Tests One-Month Best Against Canadian Dollar

January 16, 2024 - Written by Ben Hughes

The Canadian dollar (CAD) was undermined by a weaker Bank of Canada (BoC) survey on Monday with businesses reporting increased recession risks.

The Pound to Dollar (GBP/CAD) exchange rate strengthened to 1-month highs at 1.7120 before settling just above 1.7100.

The US Dollar to Canadian dollar (USD/CAD) Exchange rate advanced to near 1.3450 before settling around 1.3435.

The latest BoC business outlook survey recorded a deadline in sentiment to 9% for the quarter of 2023 from 22% previously and it has declined steadily since March 2023.

There were increased concerns over the economy within the survey with 38% of companies expecting a recession in the year ahead from 33% previously.

Consumer inflation expectations also declined in the latest survey while the labour market is seen as less tight.

Nevertheless, in historic terms, inflation expectations are still elevated.

Scotiabank commented on the Canadian outlook; “Some further improvement on inflation expectations would be welcome but that alone will not make a BoC rate cut any more likely in the next few months. March BoC swaps pricing in 12bps of cuts also looks rich but the potential for adjustment in Fed pricing for March is more meaningful and USDCAD risks still appear tilted to the topside.”

Canada will release the latest consumer prices inflation data on Tuesday.

Consensus forecasts are for prices to decline 0.3% on the month, but with an increase in the annual rate to 3.3% from 3.1% previously due to unfavourable base effects.

Measures of underlying inflation are expected to be static or marginally lower on the month.

Weaker than expected data would reinforce expectations of a BoC rate cut.

Overall risk conditions were less favourable during Monday with markets fretting over conditions within the Middle East.

The UK FTSE 100 index declined 0.5% on the day with weaker risk conditions hampering both the Pound and Canadian dollar in global markets.

According to Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets; "Sterling is moving lower amidst generalized risk negativity - GBP remains a high beta play - while markets likely speculate on near-term data risks."

Rightmove reported that asking prices for UK houses increased 1.3% in January, the largest increase for 8 months.

The UK will release the latest labour-market data on Tuesday and this will be followed by the latest inflation data on Wednesday.

CIBC’s Stretch added; "We would expect average hourly earnings, CPI, and retail spending to all undershoot expectations this week."

Consensus forecasts are for the headline inflation rate to edge lower to 3.8% for December from 3.9% previously.

The core rate is expected to retreat to 4.9% from 5.1% the previous month.

Money markets are pricing in around 130 basis points of interest rate cuts from the Bank of England by the end of the year, with a first cut likely in May.

Weak data would reinforce expectations of an earlier rate cut even if the BoE rhetoric remains hawkish.

According to Stretch; "The slower BoE reaction function does not necessarily guarantee sterling support as BoE reticence comes as macro performance looks set to remain relatively lacklustre.”

Scotiabank commented on the UK developments; “Transactions also appeared to pick up this month. Rising activity reflects some easing in mortgage rates are lenders anticipate some relaxation in BoE policy later this year.”

Rabobank is slightly more optimistic over the UK outlook following recent data release; “the UK economy has avoided the five-quarter recession that was forecast by the BoE late in 2022, while the slightly better tone of the monthly release supports a glimmer of optimism that the UK may again be able to perform a little better than expected, albeit from a low base.

It added; “The next clues as to how the UK economy is coping with economic headwinds will be provided by this week’s releases of UK CPI inflation, labour and retail sales data.”
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