Shock UK GDP Contraction Drives Pound Canadian Dollar Exchange Rate Lower

Surprise UK Growth Contraction Drags down GBP/CAD Exchange Rate

An unexpected contraction in the second quarter UK gross domestic product pushed the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate into a fresh slump.

Investors were caught off guard by the -0.2% decline in quarterly growth as forecasts had pointed towards a stagnant reading of 0.0%.

This weakness marks the first quarterly contraction in more than six years, bolstering fears of a potential UK recession in the second half of 2019.

With Brexit-based uncertainty looking set to hang over the economy for some time to come the risk of a second consecutive quarter of contraction appears elevated.

Pound Sterling (GBP) weakened across the board in the wake of the disappointing data, with investors seeing little cause for confidence in the economic outlook.

Risk Appetite Limits the Impact of Weak Canadian Housing Data

A sense of general market risk appetite helped to support the Canadian Dollar (CAD), meanwhile.

Although Thursday’s new housing price index data fell short of forecast, contracting -0.2% on the year, CAD exchange rates held onto a positive footing.

If this afternoon’s building permits data shows a solid rebound on the month this could offer an additional boost to the Canadian Dollar.

Even if permits pick up 1% on the month as forecast, though, this would not be enough to reverse May’s -13% contraction.

As long as signs point towards weakness within the domestic housing market the mood towards the Canadian Dollar could sour.

Canadian Dollar Looks for Boost on Employment Growth

Focus will also fall on July’s Canadian labour market data this afternoon, exposing the GBP/CAD exchange rate to additional volatility.

While the headline unemployment rate is not expected to see any change, holding steady at 5.5%, the data could still offer the Canadian Dollar a leg up.

A solid increase in the net change in employment figure would suggest that the Canadian labour market is continuing to tighten.

Markets could also take encouragement from the latest hourly wage rate data, with forecasts suggesting an acceleration from 3.6% to 3.8% on the year.

Higher levels of wage growth could encourage greater confidence in the Canadian outlook, reducing the case for Bank of Canada (BOC) policy action and boosting CAD exchange rates.

Stronger Employment Figures Forecast to Offer Pound Sterling Support

Confidence in Pound Sterling could improve in the coming week if June’s raft of UK labour market data proves positive in nature.

Evidence that businesses continued to hire at the end of the second quarter, in spite of escalating Brexit-based anxiety, would offer a rallying point to GBP exchange rates.

On the other hand, easing average earnings growth may leave the Pound exposed to a fresh bout of selling pressure on Tuesday.

Lower levels of wage growth could exacerbate the negative impact of mounting inflationary pressure, putting further pressure on the Bank of England (BoE) to act.

Without the support of resilient UK data the GBP/CAD exchange rate looks set to remain biased to the downside.

Louisa Heath

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