FX Daily: Trive Bullish on GBP/CAD

The ongoing divergence between the UK's weak economic outlook and the Eurozone's performance, combined with potential political stability from a Labour government and unexpected GDP growth in May, supports the GBP. BoE Chief Economist Pill's emphasis on persistent inflation and high service inflation reduces the likelihood of easing before August. The upcoming July PMIs will be crucial for assessing economic resilience. In contrast, the BoC is expected to make a second rate cut today with a 91% probability. However, there is a risk that they might hold off until September due to recent economic data, despite a weak labor market.

GBP: That great British pound…

The GBP may continue to gain from the ongoing divergence between the UK's weak economic outlook and the Eurozone's performance. Additionally, if a majority Labour government restores political stability and adopts a policy of gradual rapprochement with the EU, the UK economy could benefit further. Domestic factors have also slightly supported the GBP, with stronger-than-expected May GDP growth and BoE Chief Economist Pill's emphasis on inflation persistence in his recent comments. The June CPI data showed that services inflation remains high and sticky, with stabilization at 5.7% y/y, which does not support further easing bets before the August 1st meeting. This week's attention will be on the July UK PMIs. FX investors will be particularly interested in evidence that the UK's economic recovery has continued or even accelerated at the start of Q3. Although not central to the MPC's rate outlook, persistent economic resilience may be needed to convince policymakers to postpone any easing beyond August.

Current strength between GBP & CAD

CAD: Will be a second cut today?

Canada money markets currently assign a 91% probability of a BoC rate cut in July. ING, RBC, and Scotia all expect a follow-up 25 basis point cut after June's reduction, driven by soft economic data, including cooling inflation. The average of the BoC's core measures rose 2.6% y/y in June, down slightly from 2.63% previously, and revised down from 2.70%. Additionally, the rising unemployment rate of 6.4% and disappointing job figures add to the pressure. The latest business outlook survey suggests that inflation is expected to return close to target within 2-3 years, with firms forecasting slower growth in input and selling prices. Markets are anticipating two 25 basis point cuts this year, with a 60% chance of a third. The upcoming meeting will focus on the rate decision and the guidance provided in the Monetary Policy Report.

Current probability of Bank of Canada cut on July 2024