Pound to Canadian Dollar (GBP/CAD) Exchange Rate Drifts Higher as Political Fears Subside
UPDATE: The Pound to Canadian Dollar (GBP/CAD) exchange rate continued to trend above the week’s opening levels on Tuesday afternoon, thanks to fading UK political fears and anticipation for the upcoming Bank of Canada (BoC) interest rate decision.
Canadian Dollar (CAD) movement was little changed by the day’s Canadian housing starts results from June, which beat forecasts. May’s building permits report also beat expectations, but the Canadian Dollar’s strength remained limited.
Sterling (GBP) saw a further boost in demand on Tuesday afternoon, due to optimistic comments about the state of Brexit negotiations from European Chief Negotiator Michel Barnier.
Pound to Canadian Dollar (GBP/CAD) Exchange Rate Gains Limited as UK Growth Gets Mixed Reaction
Following a UK politics-driven selloff on Monday, the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate mostly recovered on Tuesday as political jitters eased. However, its gains were limited as some analysts showed uncertainty about the strength of the latest UK growth data.
Due to concerns about a trade war beginning between the US and China last week, GBP/CAD climbed higher throughout the week but remained in the interbank region of C$1.73.
On Monday, GBP/CAD touched on a high of C$1.74 before slumping on UK political uncertainties and then climbing back to near the week’s opening levels again on Tuesday.
News that David Davis and Boris Johnson had resigned from high-profile UK government positions briefly caused concerns that UK Prime Minister Theresa May could face a leadership challenge, but on Tuesday these fears eased off somewhat.
Sterling’s (GBP) recovery against the Canadian Dollar (CAD) was limited though, as the latest UK growth results highlighted concerns among analysts about the importance of Britain’s services sector post-Brexit.
Pound (GBP) Exchange Rates Limited as Brexit Jitters Dampen Optimism of UK Growth Results
Confidence that UK Prime Minister Theresa May would be able to maintain her position as leader even if faced with a potential leadership challenge helped the Pound (GBP) to advance on Tuesday.
However, today also saw the publication of Britain’s first monthly Gross Domestic Product (GDP) report – which got a mixed reception among analysts.
While the report showed that growth improved to 0.3% in May, following 0.2% growth in April, analysts were concerned about the continued imbalance in UK economic growth this year.
Some economists had been hoping that other sectors of the economy would strengthen amid the Brexit process, but the latest data indicated the continued dominance of the services sector.
Analysts believed it showed an urgency to protect the services sector from Brexit uncertainties. According to Anthony Kurukgy from Foenix Partners:
‘The latest growth figures were spearheaded by the service sector, despite contraction in both production and construction industries.
… Although somewhat lacklustre, today’s figures show that the PM’s call to protect the freedom of services at home and across the Channel should not be jeopardised.’
Canadian Dollar (CAD) Exchange Rate Strength Limited by Possibility of ‘Dovish’ Rate Hike
It is widely believed that the Bank of Canada (BoC) will hike Canadian interest rates during its July policy decision this week, but despite this the Canadian Dollar (CAD) has been unable to capitalise on mixed Sterling (GBP) performance.
This is because while an interest rate hike would be a hawkish move, it is already largely priced into Canadian Dollar trade. In fact, the possibility of the bank taking a more-cautious-than-expected stance in its decision on Wednesday has limited Canadian Dollar demand.
A ‘dovish hike’ is a rate hike accompanied by comments and signals from the Central Bank looking to dampen expectations for further rate hikes.
Such a move would cause bets of more 2018 rate hikes to fade, and speculation that the bank will indeed make a dovish hike has kept the Canadian Dollar looking unappealing.
Part of this speculation is due to concerns that the US-China trade war could have a negative impact on Canada’s economy. This has been another factor weighing on CAD trade in recent sessions.
Pound to Canadian Dollar (GBP/CAD) Forecast: Bank of Canada (BoC) in Focus
With most of this week’s UK data now published, the only events left on this week’s UK and Canadian calendars are Canadian housing stats and central bank events.
By far the biggest economic news of the week will be Wednesday’s Bank of Canada (BoC) policy decision, in which the bank is now widely expected to hike Canada’s interest rates for the second time this year.
The key rate is expected to be hiked from 1.25% to 1.50%.
Canadian Dollar (CAD) investors will be focused on the tone the bank takes in its decision and during the following press conference. If the bank looks to temper expectations for further hikes, GBP/CAD could climb in the second half of the week.
However, there is the potential for the Pound (GBP) to see a shift in direction too.
A speech from Bank of England (BoE) Governor Mark Carney on Wednesday evening, or any surprising developments in UK politics or Brexit negotiations could of course influence the Pound to Canadian Dollar (GBP/CAD) exchange rate.