GBP/CAD Exchange Rate Fails to Recover after Last Week’s BoE and ONS Consumer Spending Warning

GBP/CAD Exchange Rate Slumps on Gloomy UK Consumer Spending Outlook ahead of Bank Holiday Weekend

The outlook for UK consumer spending was once-again weighing on the Pound last week, with two high-profile reports prompting investors to sell Sterling, pushing the GBP/CAD exchange rate lower.

The first of these was the Bank of England (BoE) Agents Summary of Business Conditions report on 28th March, which concluded that there were some signs of ‘financial distress’ in the retail and leisure sectors due to weak growth in consumer spending.

The report also worked to dampen hopes of near-term monetary tightening, after noting that inflationary pressures were likely to continue weakening, stating;

‘Agents’ scores for consumer price inflation had inched down but remained elevated. However, contacts expected consumer price inflation to abate over the coming 12 months, especially for imported products such as clothing and cars, as the effect of Sterling’s depreciation wanes. Contacts described conditions as challenging, particularly for supermarkets and sectors with a high online presence, and so there was little opportunity to rebuild margins.’

This was followed the next day by new figures from the Office for National Statistics (ONS) which showed household spending growth had dropped to its lowest rate in six years. A drop in the rate of income saved to 4.9%, the lowest since records began in 1963, indicated that spending was not falling because consumers were saving more money, but because of poor economic conditions.

Canadian Dollar Shrugs Off Disappointing Domestic GDP Figures to Push GBP/CAD Exchange Rate Lower as Market Risk-Appetite Improves

As well as the continued gloom over the UK economic outlook, the GBP/CAD exchange rate was further pushed lower by recovering market risk appetite, as traders began to believe that the recent selloffs on fears of a global trade war sparked by US President Donald Trump’s protectionist policies may have been overblown.

Considering in the past 24 hours China announced retaliatory tariffs on US$3 billion worth of goods, the US hit back by imposing tariffs of 25% on over 1,300 products and China has responded by announcing further tariffs on 106 US additional products, that relief may have been premature; markets are clearly thinking exactly the same thing, as the softened Pound Sterling has been able to rise versus the Canadian Dollar this morning.

However, last week, market confidence had improved to such a level that disappointing GDP figures for Canada covering January were largely ignored and the Canadian Dollar was able to make further gains versus the Pound.

Month-on-month the economy actually contracted, posting a surprise -0.1% decline instead of slowing from 0.2% to 0.1% in line with forecasts.

This meant that year-on-year GDP dropped from 3.4% to 2.7%, instead of the 2.9% forecast.

Poor Markit UK Manufacturing and NAFTA Deal Hopes See GBP/CAD Exchange Rate Tumble

Disappointing manufacturing data from the UK saw the GBP/CAD exchange rate continue its tumble this week after markets returned from the long bank holiday weekend.

The Markit manufacturing PMI actually posted a surprise rise, but only on a technicality; last month’s above-forecast score of 55.1 only represents an uptick because February’s reading was retrospectively cut to 55 points.

Furthermore, combined with the other two manufacturing PMIs for this quarter, the index revealed that the first three months of the year have seen manufacturing grow at its slowest pace in 12 months.

Today’s construction PMI has done nothing to alleviate the gloom, with the index posting a shock decline into contraction territory by slumping from 51.4 to 47.

Meanwhile, the Canadian Dollar received a strong boost yesterday as hopes were improving that renegotiations for the North American Free Trade Agreement (NAFTA) may be making progress and that the comprehensive deal may be rescued rather than abandoned by the US administration.

GBP/CAD Exchange Rate Forecast to Weaken if UK Services PMI Shows Slowdown in Growth

Tomorrow sees the release of the UK services and composite PMIs for March, which could weaken the GBP/CAD exchange rate as they are expected to inch lower to 54 and 53.9 respectively.

Given the poor performance of today’s construction measure, markets may be left on edge as the release approaches; while the services index is highly unlikely to drop into contraction territory, the potential for a greater-than-expected slowdown would create further unease over the UK’s economic outlook.

Meanwhile the Canadian international merchandise trade balance is expected to show a wider deficit of –C$2.1 billion during February than the –C$1.91 billion recorded in January, which may soften any GBP/CAD exchange rate losses.

Friday is likely to see the Canadian Dollar dictating the direction of GBP/CAD movement, given the high-profile releases on offer, which include the unemployment rate, net change in employment and hour earnings growth figures.

Next week’s data calendar gets off to a slow start for the UK, while Monday and Tuesday offer Canadian housing starts and building permits figures respectively.

Wednesday sees a slew of UK data for February, including the trade balance and industrial production figures.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons