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GBP CAD Exchange Rate Pushes Higher Despite Forecasts for Weaker UK Wage Growth

May 14, 2018 - Written by David Woodsmith

Even in the absence of any fresh domestic data the mood towards the Pound picked up sharply at the start of the week, driving the Pound Canadian Dollar (GBP/CAD) exchange rate higher.

As the initial negative impact of the Bank of England’s (BoE) May policy meeting has continued to fade investors found reason to buy back into the weakened Pound.

This helped to limit the negative impact of a stronger Canadian Dollar, which continues to benefit from the more bullish nature of oil markets.

Even with market risk appetite also boosted by a weaker US Dollar, though, the GBP/CAD exchange rate was able to hold onto an uptrend on Monday.

Pound Canadian Dollar Exchange Rate Forecast to Weaken on Softer UK Wage Growth

While the appeal of the Pound has recovered somewhat, however, the outlook for the UK economy still looks rather questionable.

Markets continue to debate the prospect of the BoE raising interest rates before the end of the year, with the Bank’s lower growth forecasts offering some cause for concern.

Commenting on last week’s meeting, analysts at RBS noted:

‘The decision also came with an update to the Bank’s growth outlook. It now thinks the economy will grow by an uninspiring 1.4% this year, previously estimating it would be 1.8%. That improves slightly next year to 1.7% (formerly a similar 1.8%). While real income growth is set to remain subdued, the Bank thinks growing investment and exports will provide a good degree of offset. The inflation forecast was also trimmed as it appears Sterling’s rise is falling out of the inflation figures quicker than previously assumed. The 2% inflation target is expected to be reached in 2020.

‘The drivers of UK economic growth have shifted, with consumer spending taking an uncharacteristic backseat as investment grabs the wheel.

‘The UK construction industry had a bad start to the year, with output down 2.7% in the three months to March.

‘After March’s weather-induced low, the UK’s private sector bounce back was disappointing. Not so for all regions mind, with a strong rebound in business confidence in eleven of the twelve regions.

‘All eyes are on the housing market as the prospects show a strong north/south split. Halifax reported house prices rose 2.2% in the year to April, but that prices had started to fall in the last month.’

Tomorrow’s UK jobs and wage data could provoke further volatility for the GBP/CAD exchange rate, with particular focus falling on the wage figures.

As forecast point towards a loss of momentum on the year in the three months to March this could give investors incentive to pile out of the Pound once again.

Softer wage growth would not bode particularly well for the outlook of the UK economy, given the major role that consumer spending has had in driving growth in the wake of the Brexit vote.

Even if the labour market continues to tighten this is unlikely to be enough to boost GBP exchange rates unless wages show a similar improvement.

Brexit-based jitters are also likely to keep the Pound under some degree of pressure in the near term.

Stronger Canadian Housing Sales to Dent GBP/CAD Exchange Rate

As long as oil prices remain on a bullish trend the mood towards the Canadian Dollar is set to remain positive.

However, if US sanctions on Iran fail to provoke a fresh dip in global crude oil supplies CAD exchange rates could come under fresh pressure.

Confidence in the health of the Canadian economy could improve, meanwhile, if April’s existing home sales strengthen in line with forecast.

Signs of continued strength within the Canadian housing market may offer CAD exchange rates a boost, suggesting that the underlying health of the economy is more robust than previously thought.

Even so, anything short of a significant improvement is unlikely to be enough to alter the current policy outlook of the Bank of Canada (BOC).

A stronger US Dollar could also offer the GBP/CAD exchange rate a rallying point in the near term.
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