Pound to CAD Dollar: BoC Hold Sees GBP/CAD Held Below Five-Week Best

October 26, 2023 - Written by Ben Hughes

STORY LINK Pound to CAD Dollar: BoC Hold Sees GBP/CAD Held Below Five-Week Best

Canada Rates Held at 5.00%, BoC Still Fretting over inflation, GBP/CAD Exchange Rate Held Below 5-Week Highs

The Bank of Canada held interest rates at 5.00% following the latest council meeting, in line with consensus forecasts.

The US Dollar to Canadian Dollar (USD/CAD) exchange rate strengthened to just above 1.3800 before a retreat to 1.3765.

After sliding to 1.6670 policy decision, the Pound to Canadian dollar (GBP/CAD) exchange rate jumped to 1.6760 before fading again to 1.6720.

The Bank of Canada is confident that the tighter monetary policy is having an impact as intended.

It noted; “In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures.”

The bank also considers that economic imbalances have eased; “Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.”

The central bank is still concerned over underlying inflation trends despite progress in cutting the headline rate.

The bank expects inflation will stay around 3.5” until the middle of 2024, and will not return to its target rate of 2% until 2025.

According to the bank; “Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.”

Given the concerns over inflation, the bank does not want to relent on monetary policy; “Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.”

It adds; “Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”

Tom O’Gorman director of fixed income at Franklin Templeton commented; "It does probably take out some of that dovishness. Rates were expected to be cut earlier - I would expect some of that gets priced out."

He added; “I think eventually we're getting to that point where the rate hikes they're going to bite the economy and you are probably going to be close to a recession or recession like type of growth, flat growth here in fairly short order."

According to BMO Capital Markets chief economist Doug Porter; "The key here is the bank is probably not going to hike rates again, but they not making the mistake they made earlier this year, suggesting that they're on pause."

Andrew Kelvin chief Canada Strategist at TD Securities expects the first quarter of 2024 will be pivotal.

He added; "We don't think they will need to hike rates again. I think given this sort of dovish tone around the economy, it feels like it would be difficult to see the BOC change their direction quick enough to do anything in December. But certainly by the time we hit Q1 of next year, we will need to see further progress on inflation if the BOC is going to maintain its current policy rate."

TD does not expect rate cuts until July 2024.

According to Scotiabank; “Short and medium-term trend signals are bullish, suggesting the pair can extend its gains; a break above the early month high of 1.3786 will pave the way for funds to push on to retest the March high at 1.3862.”

ING sees little scope for near-term loonie gains; “USD/CAD does not look like a screaming sell as it did back in early September, and we see more upside risks to the 1.38/1.40 area before converging to our year-end 1.36 target.”

MUFG, however, sees the Canadian currency as undervalued; “We judge USD/CAD as overshooting based on yields and crude oil prices and a repeat of the current guidance may prompt some USD/CAD correction lower.”

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TAGS: Pound Canadian Dollar Forecasts