Risk appetite returned last week as a weaker-than-expected Japanese GDP encouraged speculation that further monetary loosening from central banks could be in the pipeline. As global stock markets rallied on the back of these hopes the price of oil was pushed back up, despite the revelation that Chinese imports had fallen sharply in January.
Oil continued to rally throughout Tuesday’s European session as Saudi Arabia and Russia met to discuss the recent price rout. While traders were initially hopeful, the value of Brent crude soon slumped once again as the agreed deal was revealed to be significantly short of what markets had hoped for. Rather than cutting production, the nations agreed to freeze output at its record-high January level, also stipulating that all other major producers would need to sign on for the agreement to be valid.
Mixed UK Inflation Data Prompted GBP/CAD Slip
Nevertheless, the Pound Sterling to Canadian Dollar exchange rate failed to derive any particular gains from this somewhat disappointing development. This was due to the Pound seeing a marked slump in demand following the latest UK Consumer Price Index, as the month-on-month and core measures of inflation proved discouraging.
Baseline inflation, while improved, remained relatively weak at 0.3% on the year, a far cry short of the Bank of England’s 2% target. As a result the chances of the BoE voting to raise interest rates in the near future were seen to decline further, with some economists estimating that monetary tightening might fail to materialise until 2020.
Canadian Existing Home Sales provided a demonstration of greater strength within the Canadian economy however, showing an increase of 0.5% on the month in January. This suggested fresh growth within the Canadian housing market and improved economic confidence, bolstering the appeal of the ‘Loonie’.
Demand for the Pound, on the other hand, slipped further on Wednesday as the latest raft of UK employment data also failed to impress traders. While the number of jobless claims declined further than forecast, this was counterbalanced by the unemployment rate’s failure to dip and weaker wage growth.
Given that members of the BoE Monetary Policy Committee have repeatedly expressed a desire to see wages rise before voting for an interest rate increase this equally dented the prospect of a near-term rate hike.
Disappointing Canadian Retail Sales Weighed on CAD
Ahead of the weekend, however, the Canadian Dollar lost its bullishness in spite of signs that Iran might agree to a limitation on oil production. December Retail Sales showed a more severe contraction in consumer demand than forecast, while the January inflation rate leapt higher. With inflationary pressure nearing the higher end of the Bank of Canada’s target range this sparked fears that the central bank could be prompted to imminently cut interest rates.
While Prime Minister David Cameron secured agreement with European leaders on reforms to the UK’s relationship with the EU, this failed to prevent a substantial slump in the Pound on Monday. Markets were alarmed by London Mayor Boris Johnson’s pledge to join the ‘Leave’ campaign, as this appeared to increase the odds of a potential ‘Brexit’.
Consequently the GBP/CAD exchange rate dipped to an eight-month low of 1.9277, although the pairing has since recovered some of its strength as the initial spurt of bearishness calmed.
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