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GBP to CAD Exchange Rate Climbs as US Midterm Election Uncertainty Dents Loonie

November 6, 2018 - Written by Tim Boyer

Despite analyst caution and disappointing UK data on Monday, the British Pound to Canadian Dollar (GBP/CAD) exchange rate has advanced this week so far. Investors have been selling the relatively risky trade-correlated Canadian Dollar in anticipation of today’s anticipated US 2018 Mid-Term Elections.

A hawkish monetary policy outlook for the Canadian Dollar has done little to help it avoid Sterling gains over the past week. GBP/CAD surged from 1.6808 to 1.7002 last week, and so far this week has kept climbing. On Tuesday morning, GBP/CAD briefly touched on a high of 1.7153 – its best level since mid-October.

GBP Sturdy on Brexit Speculation despite Persisting Uncertainties

Hopes that the UK and EU could finally reach a solid Brexit deal before the end of this month have been the primary cause of Pound strength in recent sessions.

These were also the cause of the Pound to Canadian Dollar exchange rate’s Monday gains.

Investors reacted to a weekend report, claiming that the EU was prepared to offer a UK-wide customs union arrangement in order to resolve a long-running dispute regarding Ireland’s border.

The report claimed that the customs union would be a temporary measure allowing the nation to keep a soft border with the EU until a more specific deal is agreed further down the road.

However, the reality of such a deal being met has been questioned by analysts.

Analysts argue the EU is unlikely to make such a major concession, and others express concern that the deal would not be met with support from hard Brexit supporting UK MPs.

This could mean that even if such a deal is reached, it may face significant obstacles in the UK.

Regardless though, investors piled into the Pound on Monday and the British currency avoided losses on Tuesday.

This was because regardless of caution from analysts, UK and EU negotiators are perceived as being likely to soften positions in order to make sure negotiations do not fall through.

Due to hopes that there may finally be some solid Brexit news this month, Pound investors brushed over this week’s disappointing UK services data. According to Chris Williamson from Markit, which published the report:

‘The disappointing server sector numbers bring mounting evidence that Brexit worries are taking an increasing toll on the economy. Combined with the manufacturing and construction surveys, the October services PMI points to the economy growing at a quarterly rate of just 0.2%, setting the scene for GDP growth to weaken sharply in the fourth quarter’

Regardless of this data, forecasts suggesting that Britain’s economic activity could smooth in the event of a soft Brexit kept investors hopeful for now.

CAD Limp as Investors Await US Political Developments

Despite a slew of news in recent weeks supporting Canadian Dollar bullishness, the Canadian Dollar has seen weak performance this week so far.

Investors have been hesitant to buy the relatively risky trade-correlated Canadian Dollar or take many other risks either, as they anticipate the results of Tuesday’s US Mid-Term Elections.

While moves that make investors hesitant to take risks typically boost safe haven currencies like the US Dollar (USD), concerns that the US Mid-Terms could weaken the fiscal policy ability of US President Donald Trump have left the US currency weak.

According to Mark Chandler, head of currency strategy at RBC Capital Markets:

‘This is very much a US Dollar move,

Where we have seen the US Dollar weaken, the second weakest tends to be Canada in that time frame.’

Monday’s comments from Bank of Canada (BoC) Governor Stephen Poloz were optimistic and typically would have supported the Canadian Dollar, but the ‘Loonie’ remained weak on political uncertainties.

GBP/CAD Forecast: US Mid-Term Results and Brexit Developments in Focus

Some Canadian ecostats will be published in the coming days, but market reaction to this week’s potential political developments are likely to be the biggest focus for Pound to Canadian Dollar exchange rate investors.

For example, if Tuesday’s US Mid-Term Elections lead to the Democratic Party taking the House of Congress this could weaken US President Donald Trump’s ability to push through new fiscal policy – such as the tax cuts Trump introduced.

This could lead to higher risk-aversion and safe haven demand, which could make the Canadian Dollar less appealing in the coming sessions.

Canada’s Ivey PMI data from October on Wednesday and Canadian housing starts data from October on Thursday may influence the Canadian Dollar further.

As for the Pound, any major Brexit developments are likely to take focus for investors and could leave the Pound driving GBP/CAD movement.
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