Canadian Dollar Forecast, May 2023

USD/CAD Outlook

The Bank of Canada has maintained a conditional pause since January, keeping interest rates unchanged. The Canadian dollar (CAD) has shown minimal movement against the USD year-to-date, and the broader USD/CAD range established since late last year remains unchanged at USD/CAD 1.35. Bank of Canada policymakers are currently facing challenges in their inflation fight due to solid domestic growth, tight labor markets, and increased wage growth. They are actively countering market expectations of interest rate cuts by the end of the year. The expectation is that the Bank of Canada won't increase interest rates any further during this cycle. Additionally, as the Federal Reserve is believed to have already reached the highest point in its interest rate cycle, this is likely to increase confidence in the market and lead to an improvement in risk sentiment. As a result, it's projected that the CAD will strengthen in the latter half of the year and the USD/CAD exchange rate will drop to 1.33 in the upcoming months.

US Dollar / Canadian Dollar Forecasts - May 2023

EUR/CAD Outlook

The euro recently reached its highest level against the Canadian dollar in a year, touching (EUR/CAD) 1.51. Despite concerns about a recession last fall, the eurozone economy has shown remarkable resilience, especially in the service sector. Q1 real GDP data, which is due to be released soon, is expected to show accelerated growth, contradicting previous concerns. However, a stronger economy also brings the challenge of higher inflation, with core prices showing no significant signs of easing. As a result, the European Central Bank is likely to continue its monetary policy tightening until at least June. Additionally, the interest rate differential between the eurozone and the United States is narrowing, providing further support for the euro. In the upcoming quarter, it's expected that the EUR/CAD will trade within a range of 1.47-1.50.

Euro / Canadian Dollar Forecasts - May 2023

GBP/CAD Outlook

The Bank of England has recently raised its base rate to 4.50%, indicating that a pause is unlikely due to the double-digit inflation. The strong wage growth demonstrated in the UK's labor market is significant for the central bank's decision-making process. Sterling has shown strength among the G10 currencies, rising by approximately 3.0% this year. Despite political uncertainties from last year, the UK economy has avoided recession, and high price pressures suggest potential for further tightening by the Bank of England. Furthermore, S&P has upgraded its outlook for Sterling from negative to stable. Although tighter monetary policy may result in slower growth in the near future, the GBP's "less risky" profile may lead to extended gains, with the GBP/CAD potentially reaching the 1.66-1.68 range this quarter.

British Pound / Canadian Dollar Forecasts - May 2023