GBP CAD Climbs Almost 1.5% as Bank of Canada Leaves Interest Rates Unchanged

The Pound Canadian Dollar exchange rate soared today on news that the UK’s GDP print beat expectations and that the Bank of Canada (BoC) decided to leave interest rates steady at 1% at its October rate meeting.

Bank of Canada Proves Dovish – CAD Exchange Rates Flop

The BoC decided to hold its benchmark interest rate at 1% at the October rate meeting, dashing investor hopes for a third rate hike this year and dragging the value of the ‘Loonie’ down.

Despite striking some upbeat tones about the state of the Canadian economy, the bank cited a long list of concerns, with the main culprit being anxieties regarding the strength of the Canadian Dollar and how it might continue to prevent inflation from rising.

Discussing inflation, the official statement read:

‘The Bank projects that inflation will rise to 2 per cent in the second half of 2018. This is a little later than anticipated in July because of the recent strength in the Canadian dollar’.

Having been spooked by a jump in the value of the Canadian Dollar, the bank might be attempting to curb expectations that they will move for rate hikes in the coming months by positioning themselves as dovish.
Whilst this has momentarily been successful, whether the currency will remain devalued is questionable.

Nonetheless, economists are now forecasting that the bank might put off the next rate increase until spring 2018, with Nick Exarhos, an Economist at CIBC Economics, stating:

‘Today’s statement is clearly a move to a more dovish stance by the Bank of Canada, and we find strong support to keep our forecast for a next move higher in rate to come only by the spring of 2018’.

This news further cemented the Pound’s lead.

GBP Exchange Rates Soar as UK GDP Proves Positive

The Pound was also bolstered today by markets reacting to news that the UK’s gross domestic product (GDP) exceeded expectations.

The preliminary growth estimate from the Office for National Statistics (ONS) demonstrated a rise quarter-on-quarter from 0.3% to 0.4%, above the forecasts of a 0.3% gain.

Year-on-year, UK GDP remained steady at 1.5% - exactly as forecast.

This news sent the Pound soaring, (despite on-going anxieties regarding the lack of investment driven growth), with markets considering the news to be a solid indicator that the Bank of England (BoE) will move for a rate hike after all in November.

Sam Tombs, an Economist at Pantheon Macroeconomics shared an opposing perspective however, stating:

‘The pickup in GDP growth in Q3 gives the MPC the green light to raise interest rates next week, but it is unlikely that a conventional tightening cycle is about to begin. Growth is liable to slow again over the next couple of quarters. Real household disposable incomes still have further to fall in the near-term as retailers push through further sterling-related price rises. The lack of substantial progress in Brexit negotiations means that more firms will start to activate contingency plans and delay investment’.

Regardless of this outlook, market predictions for a rate hike next week are only increasing, driving the Pound higher along the way.

GBP CAD Outlook Positive on BoE Rate Hike Prospects

The near-term outlook for GBP CAD remains firmly in the Pound’s favour, despite the current surge in crude oil prices.

Next week features the BoE’s November rate meeting, an event that markets are increasingly expecting to result in a 0.25 basis point rise in the UK’s interest rates.

Economist opinion on exactly how much the Pound will rise (and for how long) are split, however, as a November rate hike has now been almost entirely priced into Sterling.

Ian Gunner, Portfolio Manager at Altana Hard Currency Fund in London shared this sentiment, stating:

‘Whether that’s sustained (the Pound’s gains) or not depends on whether there’s an indication that there could be more steps to follow’.

Regardless, today’s dovish decision from the BoC has effectively positioned the BoE as the more viable option, leaving the outlook for GBP CAD in the Pound’s favour.