GBP CAD Exchange Rate Trends Lower as UK Retail Sales Lose Momentum

December 20, 2017 - Written by David Woodsmith

STORY LINK GBP CAD Exchange Rate Trends Lower as UK Retail Sales Lose Momentum

While markets had anticipated a slowdown in the CBI reported retail sales measure for December this still left the Pound Canadian Dollar exchange rate on a weaker footing.

Investors were not particularly encouraged by the confirmation that consumer spending had lost further momentum on the month, reflecting the ongoing wage squeeze.

The outlook for the retail sector still looks rather underwhelming at this juncture, with rising inflation continuing to erode household finances.

Alpesh Paleja, principal economist at the CBI, commented:

‘Retailers have seen decent growth heading into the vital Christmas trading period, although it was weaker than expected. It’s clear that people are stocking up on food for their Christmas lunch, with grocers’ sales driving most of the sales growth seen in December.

‘Notwithstanding the sales growth seen in the last couple of months, underlying trading conditions are tough for retailers. We expect the squeeze on real pay for households to last a while longer, so retailers will still face challenging conditions ahead.’

Given that relatively high levels of consumer spending have helped to drive economic growth in the wake of the Brexit vote this naturally put downside pressure on GBP exchange rates on Wednesday morning.

Rising Canadian Inflation Forecast to Boost CAD Demand

Confidence in the Canadian Dollar, meanwhile, has remained somewhat muted in spite of the ongoing buoyance of oil prices.

While investors expect the oil market to remain shored up by the long-running OPEC production-limiting agreement this has not been enough to keep CAD exchange rates on an uptrend in the short term.

Even so, the longer-term outlook for the commodity-correlated currency still looks rather positive, as analysts at Westpac noted:

‘Productivity gains in the tight oil sector are high and while the current number of rigs is less than half of its 2014 peak, in December US crude production was above its June 2015 high. So while US crude production has lagged expectations, we had thought it would exceed the 2015 peak earlier than this, ongoing higher than expected prices will be providing struggling drillers with an additional margin to invest back into expanding output.

‘When combined with expectations for OPEC to continue holding the line, at least to mid-2018, supply will remain firm and thus supportive of price. However, the risk of a further lift in US production cautions us against getting too bullish from here.’

So long as Brent crude prices continue to trend comfortably above the US$60 per barrel mark the downside potential of the Canadian Dollar is likely to be slightly limited.

However, with the release of high-impact domestic data later in the week the GBP CAD exchange rate is likely to see further volatility.

Forecasts point towards a solid uptick in the December consumer price index, which is expected to strengthen from 1.4% to 2.0% on the year.

This could encourage the Bank of Canada (BOC) to take a more optimistic view over the coming months, potentially putting the prospect of further monetary tightening back on the table.

An improvement in retail sales for October could also help to bolster demand for the ‘Loonie’, fostering greater confidence in the underlying health of the Canadian economy.

Higher UK Government Borrowing May Dent GBP CAD Exchange Rate

While developments surrounding Brexit are set to remain the major influence on Pound sentiment for some time to come GBP exchange rates could pick up on the back of the GfK consumer confidence index.

If sentiment holds steady at -12 or shows some degree of improvement on the month this may shore up Sterling ahead of the weekend.

On the other hand, any signs that the ongoing wage squeeze is having a greater detrimental impact on consumer confidence could weigh heavily on the GBP CAD exchange rate.

November’s public sector net borrowing figure will also be in focus on Thursday, with new government debt expected to have risen by 8.5 billion.

Given the high degree of uncertainty that still surrounds the shape of the UK’s future trade relationship with the EU any increase in borrowing is likely to discourage investors, serving as a reminder of the economy’s exposure to any deterioration in conditions.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Canadian Dollar Forecasts