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Pound Canadian Dollar Exchange Rate Gains Forecast On Softer Canadian Inflation DataMonday, June 18, 2018 > 09:34:07
Ahead of the weekend the Pound Canadian Dollar (GBP/CAD) exchange rate surged higher on the back of a surprise contraction in Canadian manufacturing sales.
As sales were found to have contracted -1.3% on the month in April this weighed heavily on the appeal of the Canadian Dollar, undermining confidence in the domestic outlook.
If the Canadian economy is in a less robust state of health this increases the likelihood of the Bank of Canada (BOC) leaving interest rates on hold in the months ahead.
This helped the GBP/CAD exchange rate push higher on Friday, with the Pound also recovering ground in spite of lingering concerns over Brexit.
Volatility in Store for Pound Canadian Dollar Exchange Rate Ahead of BoE Meeting
However, the Pound may come under renewed pressure as markets brace for Thursday’s Bank of England (BoE) policy announcement.
There is no expectation that the BoE will make any policy adjustments this week, although the meeting is still likely to provoke volatility for the GBP/CAD exchange rate.
Investors are keen to get a fresh look at the Monetary Policy Committee’s (MPC) policy outlook, with bets on the prospect of an August interest rate hike still fluctuating.
The Pound could strengthen across the board if policymakers maintain a relatively optimistic tone in spite of the disappointment of the latest UK inflation and wage growth data.
However, analysts at Nomura commented:
‘We expect the BoE to provide limited changes to its communications. We think that it is unlikely to guide the market to an August hike as strongly as it has done before, but will still signal that the meeting is “live”.’
If the meeting fails to yield enough of a signal that a rate hike could come in August this is likely to drag the GBP/CAD exchange rate lower.
With fresh UK data fairly thin on the ground over the coming days the Pound also looks vulnerable to political concerns.
As markets remain uncertain over the likely shape of the final Brexit deal, and the two sides still appear at odds over the subject of the Irish border, the upside potential of GBP exchange rates looks limited.
Analysts at Danske Bank noted:
‘A couple of days ago, it seemed likely that PM Theresa May would pass her EU withdrawal bill, but the development yesterday suggests that she might lose the vote when the bill returns to the House of Commons next week (House of Lords vote on Monday). May thinks she has the numbers to avoid a defeat to the Conservative anti-Brexiteers and soft Brexiteers.
‘Overall, do not expect much to be agreed upon at the EU summit on 28-29 June, making the EU summit in October even more important.’
Weaker Canadian Inflation Forecast to Boost GBP/CAD Exchange Rate
Rising global trade tensions have also put the Canadian Dollar under pressure this week, with the appeal of the risk-sensitive CAD dented by the prospect of a US-China trade war.
If trade relations between the US and its trading partners continue to deteriorate the mood towards the Canadian Dollar seems unlikely to improve.
With oil prices weakening in response to the increased sense of market risk aversion support for the Canadian Dollar could prove limited in the near term.
Friday’s Canadian consumer price index data could offer CAD exchange rates a rallying point, with stronger inflation likely to give the BOC incentive to raise interest rates again sooner rather than later.
However, forecasts point towards a slight dip in both the headline CPI and the core measure, something which could push the Canadian Dollar into a fresh slump.
Any weakening in April’s retail sales figures could also offer support to the GBP/CAD exchange rate, further denting confidence in the underlying health of the Canadian economy.