Data over the past seven days showed that the UK economic performance weakened in April, yet GBP/CAD managed to make strong gains as oil market fears weighed on the ‘Loonie’.
Pound Sterling Makes Steady Gains despite Manufacturing and Construction Slowdown
The latest Market PMIs have undermined confidence in the UK economy. A shock contraction in the UK’s manufacturing index for April caused Pound Sterling to tumble against the majors, although GBP/CAD remained strong. The contraction was the first in three years and contributed to the growing concerns over the UK’s manufacturing sector.
Weakness in the ‘Loonie’ prevented the Pound from sinking far below opening levels on Wednesday after the UK’s construction PMI also severely disappointed forecasts. The index had been predicted to show a -0.2 point drop to 54, but instead fell to 52. As with the manufacturing decline, the latest reading for construction was the worst in three years.
According to many economists, the approaching EU referendum is at least partly to blame for the slowdown in UK economic activity. Senior Economist at Markit, Tim Moore, commented that:
‘Softer growth forecasts for the UK economy alongside uncertainty ahead of the EU referendum appear to have provided reasons for clients to delay major spending decisions until the fog has lifted.’
GBP/CAD slipped away from a near-monthly high on the construction slump, although it still remained significantly higher on Wednesday compared to the week’s opening levels.
Positive GDP Outlook Fails to Lift Canadian Dollar as Oil Market Weakens
Data on Friday may have shown that the Canadian economy contracted on the month in February, but the -0.1% decline was smaller than markets had forecast. Year-on-year (YoY) GDP printed at 1.5% as expected, while January’s figure was retrospectively revised upwards to 1.6%. The figures caused a small slump for GBP/CAD as the ‘Loonie’ advanced. First-quarter GDP is anticipated to print at around 3%, representing the largest quarterly growth in over 12 months.
Declining oil prices have seen Pound Sterling making a steady advance against the Canadian Dollar since the weekend, however. After peaking above US$46 per barrel before the weekend, WTI Crude oil has been on a steady decline since, dropping to around US$43.60. A raging wildfire near Canada’s oil sands proved a double-edged sword on Wednesday; cutting production in the region, to the detriment of the local economy and therefore the ‘Loonie’, but helping oil prices to edge higher.
GBP/CAD Forecast: Key UK Services and Composite PMIs on Tap
Tomorrow’s UK PMIs hold the potential to cause significant GBP/CAD exchange rate movement. The services and composite indexes are both predicted to soften slightly, but after the poor performance of both the manufacturing and construction industries, the current forecasts are likely too hawkish. The services industry will need to have demonstrated significant growth in order to balance out the weakening of the other two sectors; a decline in services could see the composite index drop significantly, which would weigh heavily on the GBP/CAD exchange rate.
Canadian building permits figures for March are also set for release tomorrow and are expected to show a drop of -4.4% after March’s 15.5% surge.
On Friday, Canada’s unemployment data could weaken the ‘Loonie’ if it shows the small increase in joblessness predicted.
Heads Up
Summary of major upcoming data releases that we think may move the market.