The baseline outlook for the GBP remains bullish, supported by the BoE’s slightly hawkish stance, persistent services inflation, and rising wage growth, which have prompted markets to reduce expectations for rate cuts next year. Meanwhile, potential tariffs and political turmoil in Canada pose significant risks heading into 2025, likely exerting additional downward pressure on the CAD.

GBP: Still supported, but require new upside catalyst 

The baseline outlook for the GBP remains bullish, supported by resilient domestic data, including sticky inflation and the BoE’s gradual approach to rate cuts. However, in the absence of significant macroeconomic drivers last week, the GBP has largely tracked USD movements and responded to weaker global risk sentiment. Additionally, the release of disappointing monthly GDP data, showing a contraction of -0.1% m/m and stagnation in services at 0.0%, underscores a sluggish economic environment. While these figures are unlikely to influence this week’s widely expected BoE decision to hold rates steady, they highlight the growing risk of deteriorating economic conditions, which could increasingly weigh on the BoE's rate cut decisions in 2025.

Looking ahead, market focus will shift to the UK employment report, November CPI, and the December BoE meeting. While the employment and inflation data are not expected to influence this month’s monetary policy, they will shape expectations for the BoE’s approach in 2025. Recent employment data revealed that both headline weekly earnings and the ex-bonus measure have accelerated above 5.0%, complicating the BoE’s outlook for further rate cuts. This has led traders to reduce bets on additional cuts in the coming year. In addition, the released of the CPI revealed that the headline CPI inflation rose to 2.6% y/y in November from 2.3% in October, 0.2pp higher than the BoE’s November Monetary Policy Report forecast. Core inflation increased to 3.5% y/y from 3.3% and services inflation was unchanged at 5.0% (0.1pp above the BoE’s forecast). The rise in inflation supports the view that the BoE will remain on hold today when it announces its monetary policy decision and very likely will maintain its guidance for “gradual” rate cuts.

CAD: Potential tariffs and political turmoil

The BoC pivots towards a more gradual easing trajectory after delivering a 50bps rate cut, bringing the policy rate to 3.25%. This move aligns with the top range of the BoC's neutral rate estimate, reflecting an intention to support economic growth amid subdued inflation pressures. The BoC removed its forward guidance on further cuts, instead adopting a data-dependent approach. Despite inflation being at target, economic activity continues to disappoint, with Q3 and Q4 growth falling below expectations. Additionally, the reduction in immigration levels is expected to weigh on 2025 GDP growth and dampen inflationary pressures.

Governor Macklem acknowledged the CAD’s depreciation, attributing it largely to USD strength rather than intrinsic weaknesses. However, ongoing geopolitical uncertainties, including potential Trump tariffs, add to downside risks for the Canadian economy. While the BoC has cut rates by 175bps since June, officials now signal smaller, 25bps steps moving forward, likely once per quarter, potentially bringing the rate to 2.75% by Q2 2025. Markets currently price in 14bps of easing for January 2025, indicating a near-even split between a 25bps cut or a hold.

Looking ahead, the BoC's hawkish tone implies that while more rate cuts are anticipated, the pace will slow, balancing economic risks and maintaining inflation near target. However, downside risks loom, including weaker growth forecasts, uncertainties around tariffs, and underwhelming inflation and growth momentum. These factors collectively reinforce a bearish outlook for the CAD, with accommodative monetary policy and economic vulnerabilities likely pressuring the currency further into 2025.

Canadian CPI was mixed in Tuesday, with headline inflation printing slightly softer than expected, but core remained firm, with median printing at 2.6% and trim at 2.7%. On net, this shouldn’t change the BoC outlook much, with markets still expecting 25bps of easing in the next meeting. Despite these considerations, the baseline outlook for the CAD remains bearish as growth continues to disappoint, compounded by the looming threat of Trump’s tariffs in 2025. Subdued economic momentum, alongside geopolitical and trade uncertainties, is expected to sustain downward pressure on the CAD into the coming year.

GBP/CAD 4H Chart

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