Title: GBP/CAD Exchange Rate Outlook: UK Budget Concerns Weigh on Sterling, CAD Struggles Amid Oil Price Weakness
Written by: Matthew Andrews (adapted and expanded from original article published by ExchangeRates.org.uk)
The British pound (GBP) has faced downward pressure against the Canadian dollar (CAD) amid increasing market concerns linked to the UK’s fiscal outlook, while the Canadian dollar’s performance has also weakened due to a sharp decline in global oil prices. These developments reflect broader economic uncertainties affecting both the UK and Canadian economies, injecting heightened volatility into the GBP/CAD exchange rate. This article delves into the driving factors behind recent foreign exchange dynamics between the pound and the loonie, and outlines the key elements likely to influence movement in this currency pair in the coming weeks and months.
Key Highlights
– GBP under pressure amid fears over UK fiscal expansion
– CAD softens due to falling oil prices and global economic concerns
– UK economic data provides mixed signals on growth and inflation
– Canadian economic outlook cools as the Bank of Canada holds rates
– Forex market outlook for GBP/CAD remains volatile heading into Q4 2024
UK Budget Concerns Drag Sterling Lower
The British pound has seen notable declines against a range of major currencies over the first week of October 2024. Against the Canadian dollar, which itself is under pressure, sterling’s movements have been choppy and driven largely by domestic fiscal concerns.
UK Chancellor Jeremy Hunt is set to unveil the UK’s Autumn Statement in late November 2024. While full details are yet to be released, growing expectations of unfunded tax cuts or increased public spending have stoked fears about fiscal irresponsibility. These concerns echo anxieties from the ill-fated “mini-budget” announced by former Prime Minister Liz Truss in 2022, which triggered market turbulence and a plunge in the pound.
According to analysts from ING and other financial firms:
– Fears of fiscal expansion make investors cautious about lending to the UK at low interest rates.
– The rising cost of UK government debt (gilts) highlights reduced investor confidence.
– The widening UK budget deficit may increase calls for the Bank of England to remain hawkish.
Market sentiment suggests fiscal policy risk could overshadow other economic indicators in the coming weeks. Investors are closely watching bond markets, as higher yields on UK government bonds often portend currency weakness.
Recent Economic Releases from the UK
UK data released in recent weeks has painted a mixed economic picture. On one hand, inflation appears to be gradually softening, giving hopes that the Bank of England (BoE) may begin considering interest rate cuts in 2025. However, other indicators remain weak, particularly in terms of growth outlook.
Recent stats include:
– UK GDP was flat in August 2024, following a 0.2% contraction in July.
– Services PMI dropped to 47.8 in September, indicating contraction.
– Core inflation remained persistently high at 6.2% year-on-year, above BoE targets.
– Business investment remains sluggish amid political and economic uncertainty.
The Monetary Policy Committee (MPC) of the Bank of England chose to hold rates at 5.25% in its September meeting. Policymakers highlighted the need for sustained evidence of inflation returning to target before considering cuts. However, weakening growth paints the BoE into a corner, complicating its forward guidance.
The Pound’s Outlook Going Forward
Sterling appears stuck in a narrow corridor against the loonie, vulnerable to both external and domestic shocks. With markets increasingly jittery over government borrowing plans and a deteriorating trade position, the pound’s upside is likely to be limited in the near term.
Analysts from HSBC and Barclays Bank forecast:
– Continued pressure on GBP if gilt yields rise amid budget alarm.
– GBP may slide below the 1.65 level against CAD if fiscal credibility erodes further.
– A clearer BoE policy stance could offer support only if inflation continues to dec
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