Markets were largely caught off guard by the outcome of the UK snap general election, which yielded a hung parliament rather than the increased Conservative majority that Theresa May had intended. Sterling slumped sharply once the opinion polls indicated that the Tories were set to lose their majority, leaving GBP exchange rates to shed further ground throughout trade on Friday. While May was quick to approach the controversial Democratic Unionist Party (DUP) for an alliance this was not enough to give the Pound more than a temporary reprieve. Fears that the fallout of the election could result in a chaotic start to formal Brexit negotiations also weighed heavily on the minds of investors.
Ahead of the weekend the Canadian unemployment rate climbed from 6.5% to 6.6%, in line with forecasts. However, as this increase was attributable to a corresponding uptick in the participation rate this failed to particularly damage the appeal of the Canadian Dollar. With an increasing number of people active within the labour market this was a relatively encouraging result for the economy. As a result the GBP CAD exchange rate extended its losses further, particularly as the appeal of higher-yielding currencies generally improved.
Canadian Dollar Boosted by Optimistic BOC Comments
Comments from Bank of Canada (BOC) Senior Deputy Governor Carolyn Wilkins encouraged the GBP CAD exchange rate to slump sharply on Monday. The policymaker took a decidedly hawkish tone on the economic outlook, prompting bets that the central bank could be on course to raise interest rates sooner rather than later. While the next BOC meeting is not until July markets nevertheless rushed to price in the odds of a near-term rate hike, shoring up the Canadian Dollar against its rivals. Even though oil prices remained trapped below the psychologically important US$50 per barrel mark this was not enough to temper the bullish mood of CAD exchange rates at the start of the week.
Even so, the GBP CAD exchange rate was able to regain some ground on Tuesday as the Conservatives looked set to formalise a confidence and supply agreement with the DUP. As any immediate threat to Theresa May’s position as Prime Minister appeared to have faded somewhat the Pound was encouraged to recover from its multi-month lows. However, as the latest UK consumer price index saw inflation unexpectedly rise from 2.7% to 2.9% on the year confidence in the domestic outlook remained rather fragile. With consumer spending already under pressure and the political situation still not entirely stable Sterling remains vulnerable to downside weakness.
Dovish BoE Could Extend GBP CAD Losses
Demand for the Pound could fall markedly if Thursday’s Bank of England (BoE) policy meeting proves dovish. Policymakers are likely to take a more cautious view on monetary policy, even though inflation has already outstripped its revised forecasts. As the BoE has repeatedly indicated a desire to see wage growth pick up before considering an interest rate hike the odds of any imminent return to a tightening bias seems limited. As Brexit uncertainty continues to weigh on economic activity the central bank is likely to hold steady, limiting the upside potential of Sterling.
Developments in the oil market may weigh on the Canadian Dollar, though, if the latest US inventories data shows a build-up in stockpiles. Lower oil prices could put some pressure on the Canadian economy, diminishing the appeal of the commodity-correlated ‘Loonie’. However, if the latest home sales data prints positively hopes of an imminent BOC rate hike could keep the Canadian Dollar on a stronger footing.