Despite some strong UK data on Thursday, the British Pound to Canadian Dollar (GBP/CAD) exchange rate’s gains were limited due to an afternoon boost in market demand for riskier currencies with higher yields. This was due to signs of caution from the European Central Bank (ECB) during its June policy decision.
For most of the week, GBP/CAD trended with an upside bias. The pair opened the week at the level of 1.7323 and until Thursday regularly tested a weekly high of 1.7434. Its gains were limited though, and on Thursday afternoon GBP/CAD tumbled down to trend near a weekly low of 1.7311.
GBP Demand Limited as Investors Anticipate Bank of England (BoE) Signals
Britain’s May retail sales results beat expectations on Thursday, which briefly made the Pound more appealing as investors speculated that rising UK household activity could make the Bank of England (BoE) more likely to hike UK interest rates this year.
Every print of the retail sales report came in higher than economists expected, due to Britain’s improving weather and the Royal Wedding making consumers more eager to spend.
The month-on-month print was forecast to slow from 1.6% to 0.5%, but instead only slipped from a revised 1.8% to 1.3%.
The yearly figure was even more impressive, surging from 1.4% to 3.9% rather than climbing to 2.4% as forecast.
Despite the surprising jump in retail activity though, economists were not convinced that Britain’s underlying retail activity was improving. In fact, Ranko Berich from Monex argued that there aren’t many signals that things will improve over the longer term:
‘Today’s figures… may spark hopes of UK households… once again riding to the rescue of the economy. But seasonal effects, and the lacklustre growth in retail sales over the last six months in general, mean that this is unlikely to be the case and May’s report will probably end up looking like a false dawn in a month or two.’
This made it more difficult for Sterling to sustain its advance attempts towards the end of Thursday’s session. Rather than Bank of England interest rate hike bets rising in reaction to the news, investors opted to await next week’s anticipated BoE policy decision.
CAD Climbs on Market Risk-Sentiment despite Underwhelming Canadian Data
On Thursday, investors reacted to the latest major Central Bank news by indulging in riskier currencies with higher yields, like the Canadian Dollar.
While much of the movement was caused by a weaker Euro (EUR) and a stronger US Dollar (USD), the Canadian Dollar was still able to benefit and the currency advanced against the Pound.
The move came as the European Central Bank (ECB) cut its Eurozone growth forecasts and signalled that the bank did not plan to hike Eurozone interest rates until mid-2019 at the earliest.
It dampened the market outlook for global growth and expectations for tighter monetary policy from major Central Banks, leaving riskier currencies like the Canadian Dollar more appealing.
The Canadian Dollar also benefitted from news that rising oil prices had caused higher inflation in the Eurozone – as oil is Canada’s most profitable export.
This news helped the Canadian Dollar to hold a recovery against Sterling, despite Canada’s April house price index results falling short of forecasts.
GBP/CAD Forecast: Central Bank Speculation Remains in Focus
Central Bank news and speculation is likely to continue to drive the Pound to Canadian Dollar exchange rate over the coming week.
GBP/CAD could still end the week higher or lower, depending on how risk-sentiment influences the Canadian Dollar before markets close on Friday.
Any signs that trade jitters are worsening, for example, could make it easier for the Pound to recover some of its Thursday losses. On the other hand, any fresh Brexit concerns could push GBP/CAD down even lower.
Britain’s economic calendar will be a little quieter next week, but Pound investors will be highly anticipating next Thursday’s Bank of England (BoE) policy decision regardless.
The BoE is not expected to alter UK monetary policy at all, but any shifts in the bank’s tone regarding Britain’s economic outlook or domestic price pressures could definitely influence Sterling trade.
If the bank is more cautious than expected about UK inflation, BoE interest rate hike bets could fall and the Pound would weaken.
Next week is likely to be influential for the Canadian Dollar too. If Canada’s inflation and retail sales results beat forecasts next Friday, it could boost Bank of Canada (BoC) interest rate hike bets and leave the Canadian Dollar more appealing.
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