GBP to CAD Exchange Rate Sheds Gains as Hopes Rise for NAFTA Deal

March 21, 2018 - Written by Ben Hughes

STORY LINK GBP to CAD Exchange Rate Sheds Gains as Hopes Rise for NAFTA Deal

Despite Brexit hopes and strong UK data boosting Sterling against most major currency rivals, the British Pound to Canadian Dollar (GBP/CAD) exchange rate has shed its weekly gains and trended lower on Wednesday amid rising hopes that the North American Free Trade Agreement (NAFTA) could be successfully renegotiated.

After seeing major gains from 1.7746 to 1.8264 last week, GBP/CAD briefly touched on a yearly high of 1.8407 on Monday. This was GBP/CAD’s best level since the 2016 Brexit vote, but the pair has since tumbled and currently trends just below the week’s opening levels again.

GBP Supported by UK Data and Bank of England (BoE) Interest Rate Hike Bets

At the beginning of the week, Bank of England (BoE) interest rate hike bets surged as markets reacted to news that UK and EU negotiators had largely agreed to the terms of a post-Brexit transition period for Britain.

The news boosted market hopes that Britain would see a smooth and orderly EU exit, rather than a ‘cliff edge’ hard Brexit scenario.

With the Brexit negotiation outlook looking more optimistic, markets bet that the Bank of England was more likely to hike UK interest rates as soon as May. BoE interest rate hike bets rose even further on Wednesday thanks to the latest UK ecostats.

Britain’s January job market results beat expectations in some major prints. The key UK unemployment rate unexpectedly improved from 4.4% to 4.3%, with the employment change figure coming in at a strong 168k.

Investors were even more impressed by Britain’s January wage growth results.

Excluding bonuses, wages rose from 2.5% to 2.6% as expected. However, the print including bonuses jumped to 2.8%, above the forecast 2.6%. This was partially due to the previous figure being unexpectedly revised higher from 2.5% to 2.7%.

The stronger than expected wages data indicated to investors that the UK wage squeeze may be finally coming to an end. While some analysts warned that it wasn’t over yet, there was still confidence that things were improving.

According to Geraint Johnes, Professor of Economics at Lancaster University Management School;

‘Encouraging news on pay includes the 2.8% rise in total pay on the preferred measure, this being driven by gains in manufacturing and, particularly, construction.

Alongside the drop in consumer price inflation announced yesterday, this heralds an early end to the squeeze on real earnings. Meanwhile, the 182k rise in full-time employees in employment figure signals a labour market that continues to grow.’

CAD Strengthens on Investor Hopes for NAFTA Deal

Despite a lack of supportive Canadian data this week so far, the Canadian Dollar saw much stronger demand on Wednesday due to a perceived breakthrough in North American Free Trade Agreement (NAFTA) renegotiations.

The US Presidential administration has been renegotiating its trade agreements and the Canadian Dollar had seen broad weakness in recent weeks due to concerns that NAFTA talks could fall through.

On Wednesday it was reported that the US had dropped a demand that all vehicles made in Canada or Mexico and exported to the US must contain at least 50% US content.

The demand was one of the most contentious in renegotiations and the removal of the demand has boosted hopes that a renegotiation can be completed

Canadian Prime Minister Justin Trudeau stated on Wednesday that he was optimistic Canada would get a good deal in NAFTA talks.

On top of fresh NAFTA optimism, the Canadian Dollar was also supported by higher prices of oil, Canada’s most lucrative commodity.

GBP/CAD Forecast: Bank of England (BoE) Decision in Focus

Canadian Dollar investors may react to Wednesday evening’s Federal Reserve news, but the Pound could still drive Pound to Canadian Dollar exchange rate movement towards the end of the week in reaction to Thursday’s anticipated Bank of England (BoE) policy decision.

The Bank of England is expected to leave UK monetary policy frozen, but amid stronger UK wage growth and optimism for a smoother Brexit process, analysts are more confident that the bank could be preparing for an interest rate hike as soon as May.

If the bank hints that a UK rate hike is on the table for May, the Pound to Canadian Dollar exchange rate could see stronger demand towards the end of the week.

On the other hand though, if the bank plays up concerns about slowing UK inflation BoE rate hike bets could fall and GBP/CAD could see further losses.

The Canadian Dollar may avoid major losses against Sterling regardless if investors become more optimistic about the outlook for NAFTA negotiations.

Canadian Dollar investors are also looking ahead to Friday’s session, when Canada’s latest retail sales and Consumer Price Index (CPI) results will be published.

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TAGS: Pound Canadian Dollar Forecasts