GBP/CAD Exchange Rate Posts 6-Month Highs on UK Budget Hopes

March 7, 2024 - Written by Frank Davies

STORY LINK GBP/CAD Exchange Rate Posts 6-Month Highs on UK Budget Hopes

The Canadian dollar has been unable to make any headway in March amid concerns over the domestic economic outlook as higher interest rates bite.

The Pound has held firm in global markets on hopes for a UK recovery. In this context, the Pound to Canadian dollar (GBP/CAD) exchange rate has hit 6-month highs just below the 1.7300 level on Wednesday.

If there is a positive response to the UK budget with net gains in equities, there will be scope for further Pound gains.

There are important resistance levels around 1.7300, but if GBP/CAD can break above 1.7330, the pair will post two-year highs.

There are important events for both the Pound and Canadian dollar on Wednesday with the Bank of Canada interest rate decision as well as the UK budget.

There are also important US data releases and Federal Reserve Chair Powell testimony which will have an impact on the Canadian dollar through the US dollar.

Overall risk conditions will also be an important element for the Pound during the day.

The Bank of Canada will announce its latest policy decision on Wednesday and there are strong expectations that interest rates will be held at 5.00% for the fifth successive meeting.

Markets are pricing in just under a 20% chance that rates will be cut at this meeting.

The April decision is seen as a close call with strong expectations that rates will be cut in June.

There will be no Monetary Policy Report at this meeting and, assuming rates are left on hold, the statement and forward guidance will be key elements.

According to ING; “There is a risk on the downside for CAD as the BoC may introduce some reference to monetary easing today, but the overall message should remain a cautious one.”

It added; “There is probably little incentive for the BoC to drive rate expectations lower at this stage, and they may be happy to make this an in-between meeting without much market impact.

On the Canadian dollar ING commented; “We remain cautious about a rebound in CAD in the near term, although a broad-based dollar decline from the second quarter should – in our view – take USD/CAD to the 1.30 handle by year-end.”

TD Securities base case is the bank will state that it wants to see further progress on inflation before considering a cut in interest rates.

With no substantive change to guidance, it expects slight Canadian dollar gains on the day.

If, however, there is a notably more dovish stance with hints over an earlier cut in interest rates, TD considers that the Canadian dollar could weaken at least 0.5%.

According to RBC Capital Markets, the central bank will state that high interest rates are working, but will not sound the all clear on inflation.

Wells Fargo sees scope for an earlier move to cut rates; “we do believe policymakers may start to lay the initial groundwork for a shift to rate cuts by the middle of this year.”

It added; “BoC policymakers have expressed caution lately, but with growth slowing rather quickly and inflation receding, BoC cuts by June are looking like a higher probability event.”

The employment report on Friday will also be crucial for the Canadian currency.

According to CIBC; “we don’t expect the BoC to pivot further towards setting the stage for rate cuts until its April MPR, at which point the CAD is likely to weaken further.”

Rabobank expects relatively narrow ranges for the Canadian dollar against the US dollar given similar fundamentals.

According to the bank; “USD/CAD is still the lowest volatility free-floating USD cross and we see little reason for that to change in the coming month, with the pair likely to continue range-trading around the 1.3500 handle.”

It added; “We favor fading any move down towards 1.3300 and any move up towards 1.3700.”

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TAGS: Pound Canadian Dollar Forecasts