GBP to CAD Exchange Rate Struggles to Hold Gains as Bank of Canada (BoC) Hikes Canadian Interest Rates

July 11, 2018 – Written by Tim Boyer

As UK political jitters faded and the latest Brexit developments seemed generally optimistic, the British Pound to Canadian Dollar (GBP/CAD) exchange rate edged higher ahead of the Bank of Canada’s (BoC) policy decision.

Trade jitters, political developments and Central Bank news has caused wide fluctuations in GBP/CAD so far this week. GBP/CAD opened the week at the level of 1.7393 and briefly touched on a high of 1.7473 on Monday, before slipping again. On Wednesday, following the BoC decision, GBP/CAD trended at around 1.7382.

GBP Strength Limited by Brexit Uncertainties Despite Signs of Progress

While the Pound has recovered from its worst levels this week and the political jitters dogging the currency earlier in the week have largely subsided, the Pound’s strength was still limited on Wednesday.

At the beginning of the week, investors sold the Sterling as UK MPs David Davis and Boris Johnson resigned from high-ranking positions in the UK government.

The sudden resignations from hard Brexit advocating politicians worsened concerns that UK Prime Minister Theresa May could face a no confidence vote or leadership challenge from factions of the Conservative Party that supported a harder Brexit.

As Tuesday and Wednesday passed without any fresh developments, investors became more optimistic that Theresa May’s position as leader would likely go unchallenged, or that she would successfully defeat any no opposition vote.

Political jitters lightened and the Pound recovered its losses.

Sterling’s gains were supported further by some solid UK growth results and signs of progress in UK-EU Brexit negotiations.

However, Brexit jitters persisted and weighed on the optimism of the latest developments. The UK growth data revealed that Britain’s economy still heavily relied on the services sector and many services businesses had uncertain futures amid the Brexit process.

On top of this, while EU Chief Negotiator Michel Barnier did indicate that the UK-EU Brexit deal was around 80% completed, he continued to argue that Britain’s economy would be worse off outside the EU. He said:

‘It will be clear, crystal clear at the end of this negotiation that the best situation, the best relationship with the EU, will be to remain a member,” he said.

No deal is the worst solution for everybody. It would be a huge economic problem for the UK and also for the EU. I’m not working for that deal, I’m working for a deal.’

CAD Strengthens as Bank of Canada (BoC) Hikes Canadian Interest Rates

While an unsurprising move, the Bank of Canada (BoC) hiked Canada’s interest rates during its July policy decision. This helped the Canadian Dollar to sturdy on Wednesday afternoon and kept pressure on the Pound to Canadian Dollar exchange rate.

However, what was a surprise to some of the more bearish investors was the bank’s lack of perceived dovishness, despite the recent US trade tariff developments and trade war jitters.

The bank indicated that despite the rising uncertainty about US trade protectionism, its economic outlook for Canada was largely unchanged.

According to the bank’s statement, more interest rate hikes are expected but they will be gradual:

‘Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data,’

Ultimately, many investors had been expecting a ‘dovish hike’, a hike accompanied by signals to dull expectations for further interest rate hikes. The bank’s indication that more rate hikes would continue at a gradual pace was enough to bolster Canadian Dollar demand.

GBP/CAD Forecast: Trade Developments and Canadian Housing Data to Move Canadian Dollar

There will be no more notable UK ecostats published this week, so the Pound to Canadian Dollar exchange rate is more likely to react to political developments, trade news and Canadian data.

If there are any surprising developments in the Brexit process, or any more shocks from the UK government, the Pound would certainly be influenced. Failing that though, the Canadian Dollar will be driving GBP/CAD.

Thursday will see the publication of Canada’s May new housing prices results, which are expected to have risen month-on-month but slowed year-on-year.

These could bolster Canadian Dollar support if they impress and make it harder for GBP/CAD to recover from Wednesday’s fall, but trade developments may prove more influential.

If the US-China trade war continues to escalate, the Pound to Canadian Dollar exchange rate would have an easier time sustaining gains later in the week.

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TAGS: Pound Canadian Dollar Forecasts