"The dovish BoE view relies on weak growth bringing down inflation, and so today’s PMIs are a dent on that premise" - Goldman Sachs.

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The Pound neared February highs against the Canadian Dollar after Canadian inflation rates surprised on the downside of market expectations in January, easing pressure on the Bank of Canada (BoC) to raise interest rates again. 

Canadian exchange rates softened broadly on Tuesday after consumer prices rose by 0.5% and less than was expected for January, leading the annualised pace of inflation to fall from 6.3% to 5.9% heading into February.

Economists had looked, on average, for the consumer price index inflation rate to rise by 0.5% in January and by 6.1% for the 12 months to February but declines in prices of cellular services and passenger vehicles led the data to surprise notably on the downside of expectations.

However, the overall inflation rate was propped up by rising mortgage interest costs, accelerating food prices and more expensive gasoline, which is why the more important core inflation rate undershot the market consensus by an even larger margin than the 'headline' number.

"In January, prices rose 4.9% on a year-over-year basis excluding food and energy and 5.4% excluding mortgage interest cost," Statistics Canada said.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD. Click the image for closer inspection. 

The consensus among economists and in the market had suggested that Canada's core inflation rate was likely to rise from 5.4% to 5.5%, making January's realised 4.9% increase a significant downside surprise that is likely to be welcomed by the Bank of Canada.

BoC forecasts suggested earlier in February that inflation should fall to around 3% by the middle of the year before returning to the 2% target in 2024.

"However, the BoC's core measures of inflation remained higher than policymakers would like, with newly released monthly data suggesting that both trim and median were tracking around a 3.5% annualized pace over the past three months," says Andrew Grantham, an economist at CIBC Capital Markets. 

"Separately, retail sales rose by 0.5% in December, which was in line with the consensus expectations and the advance estimate," Grantham adds.

Statistics Canada also said on Tuesday that preliminary information suggests retail sales values rose by 0.7% in January, implying a positive 0.2% real terms increase that would indicate ongoing strength and resilience within the broader economy even after the BoC's interest rate rises of the last year.

Above: Pound to Canadian Dollar rate shown at hourly intervals alongside USD/CAD. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

Nonetheless, the Canadian Dollar softened against a broadly stronger U.S. Dollar and some other currencies following the release, though this was all merely one side of the story in GBP/CAD, which was lifted sharply by a broad rally in Sterling earlier on Tuesday. 

The Pound rallied against all counterparts in the G20 basket on Tuesday after S&P Global PMI survey indices suggested the UK economy returned to growth in February following the large declines of energy prices during earlier months. 

This comes after the Office for National Statistics said on Friday that UK retail sales rose by 0.5% in real or inflation-adjusted terms last month.

"Sterling appreciated significantly reflecting the magnitude of the beat relative to negative UK sentiment," writes Isabella Rosenberg, a strategist at Goldman Sachs, in Tuesday market commentary.

"Moreover, positive growth news has compounding implications for the BoE. This is because the dovish BoE view relies on weak growth bringing down inflation, and so today’s PMIs are a dent on that premise," Rosenberg adds. 

Above: Pound to Canadian Dollar rate shown at daily intervals alongside USD/CAD. Click image for closer inspection.