The Pound fluctuated last week as the UK formally started its two-year exit from the EU. Brexit creates a significant degree of uncertainty for the UK economy, with no-one at all sure what the final shape of any new arrangement with the EU will be. With financial institutions such as JP Morgan already making preparations to move some of their operations out of London, confidence in the Pound was shaken. Early signs of tension between the two parties also limited demand for Sterling, knocking the GBP CAD exchange rate back from its three-month high of 1.68.
Meanwhile, news of disruption at Libya’s largest oil field helped shore up the price of crude. Even though US production continues weighing on global prices this temporary dip in output helped bolster the Canadian Dollar. While the appeal of other commodity-correlated currencies remained limited in the face of renewed market optimism over the fiscal pledges of the new US administration, the ‘Loonie’ capitalised on the relative softness of Sterling.
Bullish GDP Boosted Canadian Dollar Demand
Contrary to market expectations Canadian gross domestic product was found to have strengthened in January. The economy expanded at a robust 2.3% on the year, indicating that domestic conditions are more positive than previously thought. This gave investors reason to buy back into the Canadian Dollar, in spite of the mood of risk aversion, and prompted the GBP CAD exchange rate to slump sharply on Friday. A resilient GDP raised hopes that the Bank of Canada (BOC) will not be inclined to adopt a more dovish bias in the near future.
Although the Pound had recovered somewhat ahead of the weekend, it was unable to maintain an uptrend as the matter of Gibraltar threatened to further sour talks between the UK and EU. This latest disagreement raised concerns that the two-year negotiation period could still end with the UK leaving without any deal. As a result the GBP CAD exchange rate returned to a softer footing, even as investors became more risk averse.
Weaker UK Growth Weighs on GBP CAD
Both the UK manufacturing and construction PMIs have proven disappointing this week, with the economy showing signs of faltering. Slower growth at the end of the first quarter does not bode well for the economic outlook. With Brexit uncertainty likely to put increased pressure on sentiment and consumer spending set to fall as household incomes are squeezed, activity is expected to remain biased to the downside.
However, the Pound could find a rallying point if the services PMI for March is found to have strengthened on the month. Given that the service sector is the main contributor to UK GDP, a strong showing here could alleviate concerns of a significant slowdown. On the other hand, if the index also surprises to the downside the GBP CAD exchange rate could slump sharply.
Demand for the Canadian Dollar is expected to weaken in the near term, though, as global oil production continues rising. Jitters are also likely ahead of Friday’s Canadian labour market data, with forecasts pointing towards a slight uptick in the unemployment rate. An increase in unemployment would not encourage optimism in the outlook of the domestic economy, particularly if the decline stems from a drop in full time employment.