This week has seen the Pound Canadian Dollar exchange rate surge to its best levels since early December 2016 thanks to some impressive UK inflation stats.
GBP CAD has climbed from 1.65 to 1.66 this week and briefly hit highs of 1.67 on Wednesday morning.
Britain’s February inflation stats beat expectations when they were published on Tuesday. After slower-than-expected inflation in January, this figure has led investors to believe that the Pound’s drop in value is finally causing a rampant surge in consumer prices.
February’s UK Consumer Price Index (CPI) rose from -0.5% to 0.7% month-on-month and from 1.8% to 2.3% year-on-year. The predicted results were 0.5% and 2.1% respectively.
The report bolstered hopes that the Bank of England (BoE) could soon be pressured into tightening UK monetary policy in order to tackle rising consumer costs.
However, the bank (which has left monetary policy at record-lows in order to act as a safety net during the Brexit process) remains cautious according to the tone of Governor Mark Carney.
At an unrelated Q&A session on banking standards on Tuesday, BoE Governor Carney was caught off guard and asked about the day’s UK inflation report.
Carney responded bluntly by indicating the bank would ‘never overreact to a single data point’.
While this slightly weighed on hopes for tighter UK monetary policy in the short-term, mid to long-term BoE tightening bets have increased considerably over the last two weeks.
Last week it was an unexpected vote to hike UK rates from dissenting BoE policymaker Kristin Forbes, and now a stronger-than-expected UK CPI report taking inflation above the bank’s 2% target.
The two events go hand in hand, with more traders now betting the Bank of England will hike rates earlier in 2018. Some even hope for tighter monetary policy before the end of 2017.
As a result, inflation and the tone of the BoE will only see increasing scrutiny from markets in the coming months as analysts and investors attempt to piece together when the bank will finally take action on rising inflation.
British retail sales stats from February could also alter the long-term Pound outlook when they’re published on Thursday. If retail sales come in below expectations, it will worsen concerns that higher consumer prices are making it difficult for households to keep up, which will lead to lower activity in the services sector and lower UK growth.
This week, the increase in BoE tightening bets have caused the Pound to surge against the risky Canadian Dollar. Despite solid Canadian data, high demand for European currencies have left the ‘Loonie’ in the dust.
Investors have also been increasingly disappointed in oil market news over the last few weeks. Despite oil production cuts from OPEC members and other cooperating nations, prices of the commodity have remained low due to increased production in the US and lasting oversupply issues.
If US oil production continues increasing and oil prices struggle to hold above US$50 per barrel, the long-term strength of the oil-correlated Canadian Dollar will also be damaged. This would leave the long-term GBP CAD outlook even higher.
At the time of writing, the Pound to Canadian Dollar exchange rate trended in the region of 1.67. The Canadian Dollar to Pound exchange rate trended at around 0.59.
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