Pound to Canadian Dollar exchange rates have experienced a wobbly beginning to the day as we wait for UK inflation data to be released this morning.
Initially Asian trading brought in some issues and then when the baton was passed to European trading this morning when it opened the deflation on the exchange rates became much more visible.
The reason why inflation data at the moment is having an exaggerated effect even before the news is released, can be explained with an assessment of recent Bank of England Policy.
Mark Carney, Governor of the Bank of England, last week noted that if inflation edges any higher, the bank will have to step in an raise interest rates. This is a tool used to make credit more expensive, and make saver accounts a higher yielding prospect. Effectively, this is to curtail spending, encourage saving, and therefore decrease the chance of prices running away from reality.
The secondary effect, and the bonus to anyone holding Sterling is that this means the Pound becomes a more attractive prospect for investors. If holding the currency yields a higher return than elsewhere, then demand increases and therefore so does the Pounds value respective to other countries.
Currently the Pound’s base rate is at 0.25% whilst Canada is at 0.5%. Any rise in the UK will likely be by 0.25 basis points up to the 0.5% mark. This will balance the currency favoring of investors towards Canada, and therefore should balance out the current exchange rates which favour Canadian Dollar holders so obviously.
As such, given the current trend for rising inflation, you may see an improvement on GBP/CAD rates by 9:30am GMT with the release of this inflation data, should this suggest the Bank of England’s hand may be forced.
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