Poor Canadian GDP data last week weakened the Loonie against the Pound. Finance Minister Jim Flaherty maintained his forecast for Canadian economic growth of 1.7% in 2008 but warned that the economy faces serious challenges with the slowdown in the US. We then saw Canadian GDP shrink unexpectedly by 0.3% during the first quarter of 2008 which is the first negative quarter for five years.

The contraction in Canadian GDP is a concern as another negative quarter would mean that the Canadian economy is in a recession. The BoC are in a position to try and prevent this though as inflation is still below the 2% target leaving room for further interest rate cuts to try and stimulate the economy. With further cuts expected in Canada we should see the Sterling/CAD cross sitting just below the 2 Dollar mark as high inflation in the UK is tying the Bank of England’s hands in terms of further interest rate cuts.