Pound Canadian Dollar (GBP/CAD) Exchange Rate Dented by Surprise Downward Revision to UK GDP Forecast

Update: GBP/CAD Exchange Rate Recovers Ground After Poor Canadian Sales Data

The Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate rebounded strongly on Thursday afternoon, driven higher as Canada’s December retail sales figures fell sharply short of forecast.

With sales found to have contracted -0.8% on the month confidence in the outlook of the Canadian economy deteriorated further.

This left the Canadian Dollar (CAD) under significant pressure, with falling consumer confidence and spending likely to give the Bank of Canada (BOC) incentive to maintain a more dovish policy outlook for longer.

While the mood towards the Pound (GBP) remained rather muted this was not enough to prevent the GBP/CAD exchange rate recovering the week’s losses.

Weaker than Forecast UK GDP Causes GBP/CAD Exchange Rate to Slide

A surprise downward revision to fourth quarter UK gross domestic product (GDP) prompted the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate to slump once again.

With more data now available, the Office for National Statistics (ONS) was forced to lower its forecasts, noting that business investment had stagnated in the final quarter of 2018.

All in all, this does not bode well for the outlook of the UK economy, given the high level of uncertainty that still surrounds the likely outcome of Brexit negotiations.

Quarterly growth of just 0.4% puts the UK firmly at the bottom of the pack within the G7, with weaker consumer spending looking set to keep the economy from gaining momentum in the months ahead.

This could give the Bank of England (BoE) cause to hesitate in tightening monetary policy, which would weigh down the Pound (GBP) as the prospect of an imminent interest rate hike diminishes once again.

Market Forecasts of Four 2018 Fed Interest Rate Hikes and Oil Price Falls Limit CAD

Demand for the Canadian Dollar (CAD) was somewhat limited in the wake of the release of the Federal Open Market Committee’s (FOMC) January meeting minutes, helping to diminish the pressure on the GBP/CAD exchange rate.

With markets moving to price in up to four potential Fed interest rate hikes over the course of 2018 the appeal of the commodity-correlated Canadian Dollar naturally weakened.

Downside pressure on the oil market also helped to erode CAD exchange rates on Thursday, as investors remained concerned about higher levels of US crude production.

If the latest US inventories data shows another solid build-up on the week this could see the Canadian Dollar shed further strength, with excess output likely to keep oil prices under pressure for some time to come.

Canadian Dollar Exchange Rates Vulnerable to Disappointing Inflation Data

January’s Canadian consumer price index looks set to provoke further volatility for the GBP/CAD exchange rate ahead of the weekend.

Forecasts point towards a somewhat mixed bag of data, with inflation thought to have rebounded on the month in contrast to a slowing in the year-on-year figure.

Any signs that inflationary pressure within the Canadian economy is faltering could well encourage CAD exchange rates to extend their recent losses, giving the Bank of Canada (BOC) incentive to sit on its hands for longer.

On the other hand, if inflation surprises to the upside this is likely to add to the bearishness of the GBP/CAD exchange rate in the short term.

The wider sense of market risk appetite will also continue to influence the direction of the Canadian Dollar, with CAD exchange rates vulnerable to any decline in investor confidence.

Canadian Dollar Forecast: Brexit Uncertainty Limits GBP/CAD Exchange Rate Upside Potential

A lack of certainty over the government’s aims for and approach to Brexit is likely to keep the GBP/CAD exchange rate in check.

With markets still unable to get a coherent idea of Theresa May’s plan, support for the Pound remains limited.

The continued push for a so-called of ‘hard Brexit’ from a group of Conservative MPs keeps the threat of a more acrimonious divorce alive, to the detriment of GBP exchange rates.

Unless investors see signs that the UK is taking a softer approach to negotiations the appeal of the Pound is unlikely to improve materially.

Hannah Wilson

Contact Hannah Wilson