GBP/CAD tumbles to August lows as BoC signals end of easing cycle
- GBP/CAD extends losses for the ninth straight day, hitting its lowest level since early August.
- BoC cuts rate by 25 bps to 2.25%, as expected, but signals the end of the easing cycle.
- The British Pound remains under pressure as UK fiscal worries and dovish BoE bets weigh on sentiment.
The British Pound (GBP) continues to lose ground against the Canadian Dollar (CAD) on Wednesday as traders react to the Bank of Canada’s (BoC) “hawkish cut.” At the time of writing, GBP/CAD trades around 1.8381, hovering near its lowest level since early August and extending losses for the ninth straight day. The cross has shed nearly 1.8% from its October high of 1.8915, which marked the strongest level since June 2016.
The Canadian Dollar remains broadly supported despite the interest rate cut. The BoC lowered its interest rate by 25-basis-points (bps) to 2.25%, as expected, but signalled that further easing is unlikely. Governor Tiff Macklem said the current rate is “about the right level if inflation and activity evolve as projected,” reinforcing the view that the central bank may have reached the end of its cutting cycle.
Oil prices, a key driver for the commodity-linked Canadian Dollar, lend additional support to the currency. West Texas Intermediate (WTI) crude trades around $60.41 per barrel, up more than 0.5% on the day.
Meanwhile, the British Pound weakens broadly amid rising fiscal concerns and mounting expectations of a Bank of England (BoE) interest rate cut following recent weaker-than-expected inflation and labour data. Markets now see an increasing likelihood of the easing as early as the November 6 monetary policy meeting.
Goldman Sachs on Tuesday said it now expects the BoE to cut rates next month, having previously forecast no move this year. According to LSEG data, markets price a 74% probability of a December rate cut, up from 44% in early October.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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