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GBP/USD in Flux as May Ascends to PM; USD/CAD Eyes BOC

GBP/USD in Flux as May Ascends to PM; USD/CAD Eyes BOC

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Talking Points:

- New UK PM May promises to trigger Article 50...just not right now.

- BOC could take on more dovish tone - USD/CAD triangle in play.

- As market volatility stays elevated post-Brexit, it's a good time to review risk management principles.

Theresa May ascends to the role of UK Prime Minister today, and markets are quite jolly about it. After all, just this week the PM-elect said that she wouldn't trigger Article 50 immediately upon taking office. It seems there is some growing hope that a Brexit may be avoided in time. If you're not caught up on the May's rise, we suggest you read the article, "Theresa May: New British PM."

Elsewhere, the Bank of Canada will convene today for its July monetary policy meeting, with the decision and accompanying Monetary Policy Report expected to be released at 10:00 EDT/14:00 GMT. Market participants are unanimously expecting the BOC to maintain their overnight lending rate unchanged at 0.50%, according to polls conducted by Bloomberg and Reuters. However, a look at options markets shows an implied probability of a 9.8% likelihood of a rate cut, whereas the odds of a hike stand at 0.0% for July. In a sense, there is a small dovish tilt to the market.

The BOC last lowered rates in July 2015, bringing down borrowing costs to 0.50% from 0.75%, and has since remained on the sidelines, more recently espousing a neutral approach with conditions largely accomodative. Nevertheless, it is possible that in the upcoming meeting, the BOC may take on a more dovish bias in light of disappointing economic activity data and deteriorating labor market conditions.

Although a rate cut is not the BOC’s baseline scenario and is not in the cards in the near future, it should not be ruled out entirely towards the end of 2016 or early-2017 if economic conditions continue to worsen, with the market already pricing in a 26% cut probability by December. Doves will contend that lower rates may be needed to boost inflation and to stimulate hiring at a time when the drag from low oil prices continue to undermine employment & investment in the energy sector. In any case, in light of recent developments and the low probability of a rate cut today, it is important to closely monitor the BOC's Monetary Policy Report to determine if there has been a shift in attitude towards policy accommodation.

See the above video for a technical review of the USDOLLAR Index, EUR/USD, USD/JPY, GBP/USD, Crude Oil (CFD: USOIL), and USD/CAD. If you haven't yet, read the Q3'16 Euro Forecast, "Euro Awakes to Brexit Nightmare; Time for a Turn in EUR/USD?"as well as the rest of all of DailyFX's Q3'16 quarterly forecasts.

Read more: USD/CAD is Fertile Ground; Watch Daily 8-EMA in GBP-crosses

--- Written by Christopher Vecchio, Currency Strategist and Diego Colman, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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