UK data proved distinctly disappointing over the course of the last week, with the latest raft of PMIs, trade and production figures all falling short of forecast. This rather undermined speculation that the Bank of England (BoE) could be on track to begin tightening monetary policy in the near future.
Given that Governor Mark Carney has stressed that any future interest rate hikes remain heavily dependent on signs of the continued resilience of the domestic economy. Demand for Sterling naturally weakened across the board as confidence in the UK outlook diminished once again.
The Canadian Dollar, on the other hand, rallied strongly on Friday in response to better-than-expected labour market data. Investors were pleasantly surprised to find that the Canadian unemployment rate had dipped from 6.6% to 6.5% in June, pointing towards a continued tightening within the labour market.
Although this drop was in large part thanks to an uptick in part time employment this stronger showing still fuelled bets that the Bank of Canada (BOC) is set to raise interest rates.
As a result the GBP CAD exchange rate slumped sharply ahead of the weekend, plunging to its lowest level since April.
Oil Market Worries Continue to Weigh on CAD Exchange Rates
A general decline in market risk appetite saw the Canadian Dollar knocked back somewhat on Monday, however. As the Chinese consumer price index failed to rise in line with expectations, the appeal of commodity-correlated currencies declined.
Worries over the oil market also dragged on the ‘Loonie’, with the likelihood of another production-limiting deal between oil producers seeming to diminish.
With Brent crude still trapped below the psychologically important US$50 per barrel mark and the oversupply glut forecast to persist for months to come the mood turned rather bearish.
Comments from BoE deputy governor Ben Broadbent failed to encourage any particular rally for the Pound, meanwhile.
While there had been hopes that the policymaker might also demonstrate a shift towards hawkishness markets were ultimately disappointed as Broadbent’s speech made no mention of monetary policy.
Even so, his comments on trade and the potential negative impacts of Brexit were interpreted to suggest that Broadbent will vote for no change in August. This put renewed downside pressure on the GBP CAD exchange rate, with the odds of a 2017 rate hike diminishing further.
Canadian Dollar to Spike Higher if BOC Hikes Rates
Increased volatility is likely in store for the Canadian Dollar ahead of the BOC’s July policy meeting, with markets jittery over the prospect of an imminent rate hike.
If policymakers do opt to start the monetary tightening cycle at this juncture CAD exchange rates are likely to trend sharply higher across the board.
On the other hand, if the BOC disappoints investors and fails to make its move this could see the ‘Loonie’ weaken significantly, given the high expectations already priced into the currency.
The latest raft of UK labour market data could weigh heavily on the Pound. Of particular concern to investors will be the wage growth figures, given the rapid rise of inflationary pressure.
Forecasts point towards a modest loss of momentum in average weekly earnings, however, which is likely to dent confidence in the outlook of the domestic economy.
With consumer spending already under pressure any signs that the wage squeeze is deepening could push the GBP CAD exchange rate to fresh lows.