The Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate picked up in the wake of August’s better-than-expected UK retail sales data this morning.
Markets were caught off guard as sales excluding auto fuel accelerated 0.3% on the month, defying expectations of a contraction of -0.3%.
An upward revision to July’s data added to the bullish mood of GBP exchange rates, indicating that UK consumers have continued to spend in spite of the continuing pressure on wages.
However, the underlying details of the sales data were not universally positive and investors remain wary of the prospect of households reining in their spending in the months ahead.
As James Smith, Developed Markets Economist at ING, commented:
‘Despite some better news on wage growth over recent months, real incomes remain under pressure from higher inflation.
‘But as we edge closer to the crucial pre-Christmas trading period, the big challenge for retailers could come from the threat of a ‘no deal’ Brexit.
‘With a growing number of newspaper headlines warning about the day-to-day impact this scenario would have, it’s possible this begins to take a greater toll on consumer sentiment.’
As the progress of Brexit negotiations remains fraught, with the two sides still at odds over the issue of the Irish border, the GBP/CAD exchange rate may struggle to hold onto its latest gains for long.
Stronger Canadian Payrolls to Boost CAD Exchange Rates
The Canadian Dollar could find a rallying point this afternoon if the latest ADP payrolls report proves encouraging.
Fresh signs of tightening within the Canadian labour market could see CAD exchange rates trending higher once again, with stronger employment likely to encourage the Bank of Canada (BOC).
Evidence of greater economic resilience could give BOC policymakers incentive to consider raising interest rates again sooner rather than later, to the benefit of the Canadian Dollar.
On the other hand, if the report indicates that fewer Canadians gained employment in August this could weigh heavily on demand for CAD today.
Investors are also likely to take a less bullish view of CAD exchange rates ahead of Friday’s retail sales and consumer price index data.
Forecasts point towards a dip in the headline inflation rate from 3.0% to 2.8% on the year, keeping inflation within the BOC’s target range.
However, if price pressures show signs of easing this would reduce the pressure on BOC policymakers to raise interest rates again in the near future.
An upside surprise, meanwhile, may drive CAD exchange rates on a fresh uptrend if the inflation rate rises above 3% on the year.
A rebound in monthly retail sales is also likely to offer some support to the Canadian Dollar, with higher levels of consumer spending signalling greater confidence in the outlook of the domestic economy.
If the price of Brent crude breaks back above the US$ 80 per barrel mark the mood towards the commodity-correlated CAD could improve further still.
Pound Canadian Dollar Exchange Rate Remains Vulnerable to Brexit Uncertainty
GBP exchange rates look vulnerable to renewed volatility with the release of the UK public sector net borrowing figure for August tomorrow morning.
Markets expect to see a reversal of July’s positive reading, with the budget forecast to contract -2.85 billion on the month.
Rising government borrowing is unlikely to give the Pound any particular cause for confidence at this stage, especially with Brexit-based uncertainty continuing to hang over the domestic outlook.
Even if the data surprises to the upside, though, any developments surrounding Brexit are likely to draw the focus of investors.
Until the UK and EU find common ground on the issue of the Irish border the odds of a no-deal Brexit look set to climb, weighing down GBP exchange rates.
With the November deadline for the conclusion of negotiations fast approaching markets remain wary of the possibility of talks breaking down once again unless compromises can be found.
Without signs of tangible progress the GBP/CAD exchange rate could struggle to find sustainable positive momentum in the near future.
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TAGS: Pound Canadian Dollar Forecasts