GBP to CAD Exchange Rate Tumbles as UK Inflation Slows and Bank of England Bets Lighten

July 18, 2018 – Written by Frank Davies

Demand for risky commodity-correlated currencies like the Canadian Dollar has been low this week, but due to some decent Canadian data and a slew of factors weighing on the Pound the British Pound to Canadian Dollar (GBP/CAD) exchange rate has still tumbled. The latest data to weigh heavily on GBP/CAD was Wednesday’s UK inflation report.

After trending in a tight region last week and only advancing slightly to close the week at the level of 1.7412, GBP/CAD has most of this week tumbling so far instead. GBP/CAD briefly touched a July high of 1.7466 on Monday, but has since fallen and on Wednesday trended near a low of 1.7249. This was the pair’s worst level in over a month.

GBP Tumbles as UK Inflation Report Dulls Perceived Chance of Bank of England Interest Rate Hike

Market concerns about the Brexit process and the stability of UK Prime Minister Theresa May’s leadership were already keeping the Pound unappealing this week, but Wednesday’s UK inflation results left investors even more hesitant to buy the British currency.

Britain’s June Consumer Price Index (CPI) results were published on Wednesday morning, and every notable print fell short of forecasts.

UK inflation was forecast to have slowed to 0.2% month-on-month, but slipped from 0.4% to just 0.0%. The yearly figure remained at 2.4%, despite being expected to climb to 2.6%.

Perhaps the most disappointing figure was the yearly core inflation figure, which was expected to have risen to 2.2%, but instead fell from 2.1% to just 1.9%.

The data indicated that UK price pressures were much lower than expected in June, and weighed on the perceived chances that the Bank of England (BoE) would hike UK interest rates in its upcoming August policy decision.

According to Tej Parikh, Senior Economist from the Institute of Directions, a lot of uncertainty remains about whether or not the Bank of England will make a move next month:

‘The good news should however be taken with a pinch of salt. With the recent weak performance in pay packets, and high street bargains only temporary, the cost of living still remains high.

“The stickiness in prices will reduce pressure on the Bank of England to hike interest rates in August. The decision is certainly not set in stone, particularly as wage growth is a key component of inflation, and the recent data shows little promise of a sustained rise in salaries.’

CAD Strength Limited by US Protectionism and Trade Jitters

Investors were hesitant to buy the Canadian Dollar too much on Wednesday, despite the broad Pound weakness and GBP/CAD hitting its worst levels in a month.

Despite the Pound selloff, many factors weighed on the Canadian Dollar too, limiting the Pound to Canadian Dollar exchange rate’s losses.

The primary reason for Canadian Dollar weakness has been general risk-aversion in markets, with investors avoiding risky trade-correlated currencies due to concerns about the US-China trade war and how it may impact economies around the globe.

The commodity-correlated Canadian Dollar has seen additional pressure though, due to weaker oil prices. This is due to oil being Canada’s most lucrative commodity.

Canadian Dollar strength was supported slightly by Canada’s May manufacturing sales results, which beat forecasts of 0.5% and jumped from -1.1% to 1.4%.

GBP/CAD Forecast: Retail Sales Results and Canadian Inflation Figures in Focus

Lower Bank of England (BoE) interest rate hikes and persistent Brexit jitters are likely to keep the Pound to Canadian Dollar exchange rate weak in the coming days, but the pair could be influenced by upcoming UK and Canadian data before markets close on Friday.

Thursday will see the publication of the week’s last influential UK dataset, June’s retail sales results.

However, amid the Brexit uncertainties and low UK inflation figures, the UK retail sales data would need to be particularly impressive to have a notable upside effect on Pound trade.

Friday’s Canadian inflation and retail sales results may be more influential and could inspire movement in the Canadian Dollar, which has seen relatively limp trade for most of the week so far.

If Canadian inflation beats forecasts for example, the Pound to Canadian Dollar exchange rate may fall even further as investors would become more confident in the Bank of Canada’s (BoC) relatively hawkish monetary policy outlook.

On the other hand though, poor Canadian inflation or retail data may make investors even more hesitant to buy the currency and help the Pound to Canadian Dollar exchange rate to recover.

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TAGS: Pound Canadian Dollar Forecasts