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Could Weaker UK Services PMI Extend GBP CAD Exchange Rate Losses?

July 4, 2017 - Written by David Woodsmith

Confidence in the Pound remained decidedly muted on Tuesday, with June’s UK construction PMI falling short of forecast in the wake of a similarly disappointing manufacturing PMI.

This indicated that growth in the UK economy lost some momentum in the last month, putting further pressure on the second quarter Gross Domestic Product.

While the construction PMI remained in expansion territory the details did not appear to bode overly well for the outlook of the sector.

As Tim Moore, Senior Economist at IHS Markit, commented:

‘Survey respondents commented on renewed caution among clients, in response to heightened political and economic uncertainty. Fragile business sentiment led to delayed decision-making on large projects and greater concern about the outlook for workloads during the next 12 months. While construction firms remain upbeat overall about their near-term growth prospects, the degree of confidence fell to its lowest so far this year.’


This left the Pound Canadian Dollar exchange rate on a weaker footing, even as markets continued to bet on the odds of the Bank of England (BoE) raising interest rates in the near future.

While noted hawk Ian McCafferty reiterated his willingness to vote for an imminent interest rate hike this was not enough to bolster demand for the Pound.

Rather, this hawkish commentary was counteracted by dovish words from fellow Monetary Policy Committee (MPC) member Gertjan Vlieghe.

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As Vlieghe noted that a premature hike would be more destructive in the current economic environment than a late move this reasserted the more dovish tilt of the majority of the MPC.

This left Sterling lacking in any particular support during Tuesday’s European session, extending the downtrend of the GBP CAD exchange rate.

Rising Odds of BOC Action Support Canadian Dollar Demand



Even though oil oversupply concerns persisted at the start of the week this was not enough to keep the Canadian Dollar on a softer footing.

Investors piled into the commodity-correlated currency on the back of June’s Canadian manufacturing PMI, which only eased slightly on the month.

As the sector stayed in a solid state of growth the odds of an imminent Bank of Canada (BOC) interest rate hike remained heightened, supporting CAD exchange rates.

Expectations for the BOC are unlikely to be knocked even if domestic data disappoints in the near term, as Alvin T. Tan, research analyst at Societe Generale, noted:

‘We previously mentioned the positive growth momentum in Canada this year, but noted that inflation remained the crucial missing piece. Wage growth has been unexpectedly weak despite the low unemployment rate, and core inflation readings have trended lower for several months. Nonetheless, the signal from the BOC is very clear, and a rate hike is imminent, if not in the July meeting, then in September.’


This is likely to keep the Canadian Dollar shored up against its rivals in the coming days, although a deterioration in market risk appetite could offer the GBP CAD exchange rate a potential rallying point.

Even so, if Friday’s raft of labour market data surprises to the downside this could put some measure of downside pressure on the Canadian Dollar.

While the ‘Loonie’ remains vulnerable to any negative developments in the oil market, however, any losses may be limited, as Derek Holt, VP and Head of Capital Market Economics at Scotiabank noted:

‘The currency should be weaker given still-soft commodity prices, but if the worst effects of the commodity price plunge have worked through the economy, then CAD is still accommodative at the point when spare capacity is closed.’


Weak UK Services PMI Could Dent Pound Outlook



Demand for the Pound, meanwhile, could deteriorate further if June’s services PMI also proves to be a disappointment.

Weakening growth within the service sector would be a particularly negative sign for Sterling due to the fact that the sector accounts for more than eighty percent of the UK’s economic activity.

A weaker showing here could push the GBP CAD exchange rate to fresh multi-week lows, undermining any optimism in the outlook of the domestic economy.

On the other hand, if the PMI prints positively this may encourage investors to buy back into the weakened Pound and buoy GBP exchange rates across the board.
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