GBP/CAD To Rally Into 2022

#OPINIONLEADER#

ByJin Dao Tai

 DEC 23, 2021

BoE caught the market off guard once again!

The Bank of England (BoE) surprised the market during their previous meeting in November when it held interest rate unchanged at the all-time low of 0.10% as opposed to the market’s expectation of a rate hike. Last week, the BoE once again caught the market by surprise when it announced a 0.15% hike in interest rate as the central bank was expected to keep rate unchanged amid the rising number of COVID Omicron cases in the United Kingdom. To the surprise of many, eight out of nine committee members of the British central bank voted for a rate hike, making it an almost unanimous decision. The voting result is of a big difference from the previous meeting’s whereby only two members voted for a rate hike. What makes this voting result so surprising is that the BoE has downplayed the renewed COVID uncertainty despite the rise in cases from the Omicron variant. As for quantitative easing (QE), there was a unanimous vote to keep asset purchase unchanged.

Resilient job market and strong inflation in the UK

With regard to the conclusion of the UK furlough scheme in September, the BoE highlighted that there were no strong signs of weakness in the labour market. Instead, employment reports from the Labour Force Survey showed that unemployment rate has fallen to 4.2% in the three months to October and that 257,000 jobs were added into the economy in November. Furthermore, the released employment data was in line with the central bank’s projection and it was also mentioned back in the November’s meeting that an interest rate hike is necessary to tame the decade-high inflation if the employment condition has been met.

Speaking of inflation, the decade-high annual inflation level of 5.1% has caught the attention of the UK Finance Minister, which led to an exchange of open letters between him and the central bank’s Governor Andrew Bailey. It is likely the case that the BoE received some form of pressure from the country’s Finance Minister to take action on the inflation issue. Moreover, according to the central bank’s forecast, inflation is projected to remain around the current level throughout the winter period before peaking at around 6% in April 2022. An inflation level of 6% would mean that prices are rising thrice the pace of the BoE’s target of 2%. And if the central bank were to delay its rate hike till next year, the ongoing supply chain disruption may worsen due to the uncertainty caused by the COVID Omicron variant, hence potentially adding more upwards pressure to inflation. Thus, the BoE felt that a rate hike is warranted.

BoC ends 2021 lying low

Unlike its UK counterpart, the Bank of Canada (BoC) chose to stay out of action during its final meeting earlier this month, holding interest rate unchanged at 0.25%. This came as a surprise to some as they were expecting the central bank to carry out its first hike. As a result, the Canadian dollar took a hit. Nevertheless, forward guidance remains unchanged, indicating that the BoC will keep interest rate unchanged until its 2% inflation target is sustainably achieved, which is projected to happen during the “middle quarters of 2022”.

Falling oil prices amplified downward pressure of CAD

Besides taking a hit from the rate hike disappointment, the Canadian dollar was dealt a second blow when oil prices declined due to renewed COVID fear. Specifically, the increasing number of COVID Omicron cases around the world (especially the U.S. and the UK) led to growing speculations that a new wave of lockdown measures may be imposed, thus leading to a decline in the demand of oil. Adding on to the uncertainty, the OPEC+ announced that its December’s meeting “remains in session” as the organization continues to monitor further developments of the pandemic, carrying out ad-hoc adjustments to its oil production quota as and when necessary.

GBP/CAD – Recovery from its 21-month low

Prior to the BoC’s policy decision to keep rate unchanged, GBP/CAD has traded to its 21-month low level of 1.6640. It then made a reversal post BoC’s announcement and has been rallying to the current 1.71 handle. With the BoE being more hawkish than the BoC in terms of monetary policy and the downward pressure on oil prices, GBP/CAD’s rally may continue into the new year and continue for the time being.