Softer Canadian Dollar and Buoyant Sterling Support GBP/CAD Near 1.65

“Any signs of continuing economic divergence in the UK’s favour should result in a stronger GBP” – HSBC.

Canadian Dollar and Buoyant: The Pound to Canadian Dollar exchange rate has attempted to draw a line under its April loss with the help of an underperforming Canadian Dollar and a buoyant market for Sterling, which could keep GBP/CAD supported in the 1.65 to 1.66 area over the coming days.

Canada’s Dollar lagged behind other major currencies in Monday and Tuesday price action that has so far halted the April decline in GBP/CAD and left the Loonie appearing as a relative underperformer alongside the U.S. Dollar, Japanese Yen and South African Rand  

Canadian Dollars were sold from the outset including on Tuesday when official figures suggested the Bank of Canada (BoC) may be having some success in its effort to bring annual inflation back into line with the 2% target.

Inflation fell from 5.2% to 4.3% last month after declining energy prices and smaller increases in the cost of other items were supplemented by statistical ‘base effects’ that pulled annual price growth down in a mechanical fashion.

“Prices remain elevated. Compared with 18 months ago, for example, inflation has increased 8.7%,”

Canadian Dollar and Buoyant

Canada’s inflation rates also moderated after energy and food items are removed from the goods and services basket while the Bank of Canada’s three different measures of ‘core inflation’ each continued their multi-month downtrends. 

“While food price inflation slowed, prices continued to rise on a month-to-month basis which is in slight contrast to the US figures last week,” says Andrew Grantham, an economist at CIBC Capital Markets. 

“With core measures remaining above the 2% target, the Bank of Canada will still be concerned as to where the ultimate landing spot for inflation will be. As such, policymakers will likely maintain a hawkish tone for now, with interest rate cuts not in the cards until early next year,” CIBC’s Grantham says.

Tuesday’s data might be welcomed by the BoC but its forecasts indicated last week that inflation could take until the end of 2024 to return to the 2% target so the April figures won’t necessarily change the interest rate outlook. 

The BoC has kept its cash rate unchanged since raising it from 4.25% to 4.5% in January while Governor Tiff Macklem said last week that investors and traders would probably be mistaken if expecting interest rates to be cut any time soon.

Prices in interest rate derivative markets have indicated through much of the year-to-date that investors and traders expect borrowing costs to be cut this year.

GBP/CAD fell further from the one-year highs of late March following last week’s update but has since found its feet with the help of a softer Canadian Dollar and buoyant market for the Pound.

“We have been constructive on GBP since November 2022 and believe this counter-consensus view has room to run further, especially in light of today’s strong labour market data,” writes Dominic Bunning, head of European FX research at HSBC, in a Tuesday market commentary.

“Any signs of continuing economic divergence in the UK’s favour should result in a stronger GBP, especially in an environment where many market participants still appear to be sceptical about the UK’s recovery,” Bunning adds.

The Pound benefited on Tuesday when Office for National Statistics data suggested growth in the average wage or salary remained elevated near some of its highest levels for decades in February with possible implications for the Bank of England (BoE) interest rate outlook. 

But much is hinged on whether UK inflation shows signs of converging on Wednesday with Bank of England forecasts after the BoE suggested last month that it should fall from 10.4% in February to around 4% by year-end and even if Bank Rate is left unchanged at 4.25% in the interim.