Pound Canadian Dollar (GBP/CAD) Exchange Rate Weakens, Then Rebounds

At the time of writing, GBP/CAD is trading at C$1.7777, virtually unchanged from opening levels.

The Pound (GBP) was subdued at the start of the week, as a lack of domestic data left traders to mull over last week’s disappointing retail statistics. In June, sales fell by 1.2% rather than the 0.4% forecast; on an annualised basis, retail activity unexpectedly contracted.

The release highlighted the negative impact that high borrowing rates are having on consumer spending; meanwhile, a deceleration in the rate of wage growth belied the wider economic impact of restrictive monetary policy. In May, average salaries increased by 5.7%: the slowest rate of growth since September 2022.

Following the two publications, investors dialled back expectations of an interest rate hold from the Bank of England (BoE), despite headline inflation exceeding expectations last month. Previously, bets for a hawkish monetary policy stance from the UK’s central bank had supported the Pound.

Now, markets suspect that the BoE may cut interest rates next week, narrowing monetary policy divergence between itself and the Federal Reserve. However, relative silence from BoE fosters uncertainty, further pressuring GBP morale.

Multiple economists warn of the likely effects that a dovish move from the BoE could have upon Sterling performance ahead.

Chris Turner, ING’s global head of markets, observes that August’s rate meeting will be ‘the first big opportunity since the UK election to hear what the BoE are really thinking… [it could be a] downside risk.’

Meanwhile, FX strategists from JP Morgan assert that Sterling is ‘very clearly at risk of any deterioration in its local outlook.’

Canadian Dollar (CAD) Buoyed by USD Strength

The Canadian Dollar was able to climb against its peers yesterday, supported by upward momentum in US Dollar exchange rates. Given the strong positive correlation between the currencies, the ‘Loonie’ benefitted from USD tailwinds.

The surge in CAD support defied falling oil prices: ordinarily, the Canadian Dollar is subdued as crude oil devalues, given the reliance of the country’s economy on fuel exports. WTI headwinds were insufficient to dent morale on Tuesday, however.

The memory of last week’s dismal retail data also failed to reverse ‘Loonie’ gains: sales in May fell by 0.8% rather than 0.6% as expected. Instead, traders were likely focused upon the upcoming interest rate decision of the Bank of Canada (BoC).

While expectations for an interest rate cut from the BoC paint the central bank in a dovish light, the prospect of looser monetary policy coupled with easing inflation raises hopes of a robust economic recovery.

Such hopes are bolstered by an upbeat forecast from the International Monetary Fund (IMF). A report released last Wednesday revealed that the IMF is now projecting the Canadian economy will grow by 2.4% in 2025: the fastest rate among the G7 and other advanced economies.

In concluding its 2024 Article IV Consultation with Canada, the IMF said:

‘Inflation has come down almost to target, while a recession has been avoided, with GDP growth cushioned by surging immigration even as per capita income has shrunk.

Meanwhile, the financial sector remains resilient, with banks well capitalized and liquid.’

GBP/CAD Exchange Rate Forecast: BoC Decision in the Spotlight

Into today, the direction of the Pound Canadian Dollar exchange rate is likely to be determined by the outcome of the Bank of Canada’s interest rate decision.

The bank is widely expected to cut interest rates by 25bps in accordance with easing inflationary pressures and concerns that restrictive monetary policy is preventing economic expansion. Markets have already priced in the cut, therefore the impact of the rate reduction is likely to be minimal.

Elsewhere, Sterling may trade upon the latest PMI results. Both service sector and manufacturing activity are expected to have expanded this month according to this morning’s flash: if the data prints as forecast, GBP may enjoy a boost.