Confidence in the oil market has been largely lacking in recent weeks, with the Baker Hughes count of US rigs continuing to tick steadily higher. As this suggests that capacity is increasing (in the US at least) fears over the persistent global supply glut have been reignited. A larger number of active rigs would seem to point towards a further increase in domestic stockpiles, a prospect that helped to drive the price of Brent crude back to the region of multi-month lows. Given the close correlation of the Canadian Dollar to this major commodity, the bearish trend saw the GBP CAD exchange rate strengthen.
However, Pound gains were ultimately limited on Tuesday due to unexpectedly dovish commentary from Bank of England (BoE) policymaker Martin Weale. Previously one of the more hawkish members of the Monetary Policy Committee (MPC), Weale indicated the belief that the BoE should ease policy at its August meeting and prompted a sharp Pound sell-off. In the wake of these comments, and the discouragingly weak domestic data that precipitated them, the odds of the BoE cutting interest rates were seen to strengthen considerably and the GBP CAD exchange rate fell to a weekly low of 1.7271.
Brexit Worries Hampered Pound despite Strong Headline GDP Figure
Far from offering Sterling a rallying point, the second quarter UK GDP report released on Wednesday only served to increase the malaise surrounding the ailing currency. The economy was shown to have been in a stronger state ahead of the Brexit vote, with the headline figure clocking in at growth of 2.2% on the year rather than 2.0%. However, the underlying details of the data were rather less positive, indicating that the bulk of economic activity had occurred in April before essentially grinding to a halt in May and June. This did not seem to bode overly well for the outlook of the domestic economy, considering the negative impact the referendum result has already been shown to have had on activity and confidence.
While markets had not anticipated any change in policy from the Federal Open Market Committee (FOMC) at its latest policy meeting, that didn’t stop risk appetite surging when the tone of statement was judged to be less hawkish than expected. As a lack of guidance over the possible timing of the Fed’s return to a monetary tightening cycle weighed on the US Dollar, this allowed the ‘Loonie’ to make fresh gains against rivals.
Even so, it was ultimately not long before the Canadian Dollar returned to a weaker footing. Investors were disappointed to find that Canadian GDP had fallen short of forecast in May, slowing markedly from 1.5% to 1.0% on the year. This did not encourage particular optimism in the outlook of the domestic economy, although some of the bearishness of the figure was muted due to the fact that it was at least somewhat dragged down by the impact of the Alberta wildfire.
GBP CAD Exchange Rate Expected to Remain Weak with BoE Poised to Cut Rates
Despite further signs of weakness stemming from the UK’s vote to leave the EU, the GBP CAD exchange rate soon returned to an uptrend at the start of the new week. July’s Manufacturing PMI was found to have slumped further than forecast to dip from 52.1 to 48.2, signalling a severe slowing in sector growth. However, with Brent crude still under pressure at less than US$43 per barrel the Pound managed to limit its losses against the Canadian Dollar to trend in the region of 1.7301.
Further volatility should be expected ahead of Thursday’s Bank of England (BoE) interest rate decision, even though markets have already largely priced in the impact of interest rates being cut to a fresh record low. If policymakers adopt a more dovish tone in the accompanying meeting minutes then the GBP CAD exchange rate could yet have further to fall. Conversely, any lack of action, or a more limited level of policy easing, could see the Pound enjoying a bullish run.
Demand for the Canadian Dollar, meanwhile, is predicted to weaken in response to Friday’s Unemployment Rate. Forecasts point towards a rise from 6.8% to 6.9%, in conjunction with 10,000 people expected to have left employment in the last month. This could offer the GBP CAD exchange rate a fresh rallying point, with further signs of weakness in the Canadian economy likely to dramatically reduce the appeal of the ‘Loonie’.