GBP CAD Exchange Rate Recovers Ground After Mixed Canadian Data

December 22, 2017 - Written by Frank Davies

STORY LINK GBP CAD Exchange Rate Recovers Ground After Mixed Canadian Data

An upwards revision to the finalised third quarter UK gross domestic product failed to lift the Pound Canadian Dollar exchange rate ahead of the weekend.

While the headline figure was positive, rising from 1.5% to 1.7%, this was overshadowed by more disappointing details within the report.

Investors were particularly discouraged by the household spending data, which showed that spending growth had slowed to a five-year low during the third quarter.

This is likely the result of rising inflation and the on-going wage squeeze, something which is likely to keep up the pressure on households over the coming months.

As a result, the mood towards the Pound remained rather muted during Friday’s trading session as worries over the domestic outlook persisted.

Bullish Canadian Inflation Data Boosts CAD Demand

Confidence in the Canadian Dollar, meanwhile, remained heightened in the wake of Thursday’s better-than-expected consumer price index and retail sales data.

With inflation surging 2.1% on the year in November the odds of a return to a monetary tightening bias from the Bank of Canada (BOC) appeared to increase.

This naturally encouraged investors to pile back into the ‘Loonie’, particularly as the appeal of the US Dollar declined in response to disappointing domestic data.

However, the appeal of the Canadian Dollar eased somewhat after October’s gross domestic product showed stagnation on the month.

All in all, the outlook for CAD exchange rates remains positive at this juncture, though, as researchers at ING noted:

‘NAFTA risks mean that the tide will remain high for the CAD early next year - although we do expect the currency to hold on given that we believe such risks have already been adequately priced in. This suggests that USD/CAD will bounce side-to-side around the 1.27 anchor point in 1Q18. Beyond this, we do see CAD as the darling of the Dollar bloc amid an outperforming Canadian economy, the resumption of the BoC's hiking cycle and reduced sensitivity to supply-driven oil price moves.’

Even so, in the absence of fresh domestic data over the coming week is likely to offer support to the GBP CAD exchange rate in the short term.

Brexit Forecast to Hang Over GBP Exchange Rate Outlook

Political jitters and worries over Brexit are likely to remain a dampening force for GBP exchange rates for some time to come.

Although Brexit negotiations are now proceeding to their second phase a significant degree of uncertainty still lingers over the future trade relationship between the UK and EU.

Speculation on the subject looks set to drive Pound volatility, particularly in a data-thin environment, as analysts at ING noted:

‘While the next stage of Brexit negotiations will be much more testing for our positive GBP call - and may require living on a prayer at times – we do have Faith (George Michael) that politicians are on a path to delivering an economically rational Brexit. A transition deal until at least the end of 2020 - and the partial reduction in uncertainty that this brings - would help alleviate the cliff-edge fears of UK businesses. This could see some of the cyclical pessimism over the UK economy priced out of GBP - although the semantics of a transition period matter for how forceful any positive GBP re-rating story will be. We have a conviction call for GBP/USD to move up to 1.40 in 1Q18.

‘Despite our constructive view, it would be remiss to claim that The Only Way Is Up (Yazz) for the pound - especially when taking stock of the fragile UK political backdrop. While it doesn't appear that Theresa May will be Walking Away (Craig David) from all the Brexit and domestic political troubles in her life, any factor that meaningfully pushes us closer towards a WTO trading relationship with the EU - especially in the absence of an agreed transition deal - could mean that it All Falls Down (Kanye West) for GBP next year.’

If Theresa May’s position is seen to weaken further this could put pressure on the GBP CAD exchange rate, with Pound upside likely to remain limited unless market confidence in the government picks up significantly.

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TAGS: Pound Canadian Dollar Forecasts