Due to a jump in trade jitters, following news that the US still intended to slap strict trade tariffs on imports of Canadian goods, the British Pound to Canadian Dollar (GBP/CAD) exchange rate saw a recovery towards the end of the week. However, its gains were limited amid broad weakness in Sterling trade.
After opening this week at the level of 1.7253, GBP/CAD trended close to the week’s opening levels until Wednesday, when it slumped to 1.7066. This was the worst GBP/CAD level since January, but the pair recovered from this low towards the end of the week and trended closer to the level at 1.7210 at the time of writing.
GBP Lacks Drive to Continue Recovery Rally Despite Solid UK Manufacturing Data
While there were many factors weighing against the Canadian Dollar towards the end of the week, a broadly unappealing Pound just wasn’t strong enough to make a bigger recovery against the ‘Loonie’.
Analysts doubt there will be much incentive for investors to buy the Pound in the short to mid-term, as Britain’s economic outlook remains murky, Brexit uncertainties persist and Bank of England (BoE) interest rate hike bets have been falling.
Last week’s disappointing UK inflation and growth reports were disappointing, indicating that Britain’s economy was not as resilient amid the Brexit process as previously hoped.
Thursday saw the Pound supported slightly by Gfk’s May UK consumer confidence survey. The data beat forecasts slightly, lightening from -9 to -7 rather than the forecast -8.
Friday’s UK manufacturing PMI from Markit was also stronger than expected. The results were forecast to slow to 53.5, but unexpectedly advanced to 54.4.
Investors remain highly uncertain about whether or not the Bank of England (BoE) could hike UK interest rates before the end of the year, but some analysts still believe a rate hike is quite likely.
However, it may largely depend on how next week’s UK ecostats end up. According to James Smith from ING Bank:
‘Of course, the UK’s manufacturing sector only makes up around 10% of the economy, so we suspect the Bank of England will be paying closer attention to next week’s services index as it tries to gauge whether growth is rebounding after the weaker first quarter.
After a couple of months of dismal weather, May finally saw the sun come out and this should have given the struggling high street a much needed boost. That said…we think consumer-facing sectors are not out of the woods just yet.’
CAD On Track to Gain Versus GBP Despite Trade War Jitters
Optimistic Canadian data and a hawkish Bank of Canada (BoC) have helped the Canadian Dollar to advance this week, despite renewed trade war fears hitting the currency towards the end of the week.
The Canadian Dollar was unable to hold its best levels as the US government confirmed it would go ahead and impose strict trade tariffs on some of the nation’s closest allies.
Canada was hit with tariffs on US imports of Canadian steel and aluminium. As a result, Canada announced retaliatory tariffs.
Investors became anxious that the escalating trade threats could lead to a full blown trade war, which left risky trade-correlated currencies like the Canadian Dollar much weaker at the end of the week.
Still, the currency benefitted strongly from the BoC’s hawkish tone this week and was still on track to register gains against the Pound.
GBP/CAD Forecast: Trade Developments and UK Services in Focus
The Canadian Dollar is likely to remain unappealing as investors fear the impact of US trade tariffs on Canadian industry and economic activity. Still, the Pound to Canadian Dollar exchange rate may be in for further losses regardless if upcoming UK data disappoints investors.
Tuesday will see the publication of Britain’s May services PMI. As services make up a notable chunk of British economic activity, this will give investors a much better idea of how Britain’s economy fared last month.
The figure is currently forecast to have risen from 52.8 to 53.5, as Britain recovers from poor weather impacting activity in Q1.
If the data beats expectations, the Pound could be in for a week of gains as Bank of England (BoE) interest rate hike bets would rise.
On the other hand, if the data disappoints the Pound outlook would worsen further and GBP/CAD would tumble.
The Canadian Dollar could see stronger demand if there are any signs that the US may pull back on its trade tariff plans, or if April’s Canadian trade balance results impress investors on Wednesday.
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