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Pound Sterling Canadian Dollar (GBP/CAD) Exchange Rate Strengthens After Conservative MPs Fail to Oust Theresa May

December 13, 2018 - Written by Frank Davies

Pound Sterling Canadian Dollar (GBP/CAD) Exchange Rate Benefits as May Sees Off Coup

After Theresa May saw off a vote of no confidence the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate was encouraged to extend its recovery.

As Conservative MPs are now unable to challenge May’s leadership again for another twelve months this offered some degree of political stability to markets.

Even so, with the issue of Brexit and the controversial Irish backstop still unresolved as May seeks concessions from EU leaders GBP exchange rates may struggle to hold onto a positive footing.

The disappointing nature of November’s RICS house price balance limited the appeal of the Pound, meanwhile, as the UK housing market continued to show signs of slowing.

While market risk appetite generally picked up this was not enough to support the Canadian Dollar, meanwhile.

CAD Exchange Rates Struggle in Spite of Easing Global Trade Tensions

Hopes of an easing in tensions between the US and China failed to shore up CAD exchange rates, with confidence in the outlook of the Canadian economy generally muted.

With oil prices still under pressure and recent domestic data showing signs of weakness investors have seen little cause for confidence in the Canadian outlook.

Commenting on the disappointing third quarter capacity utilisation rate Krishen Rangasamy, analyst for National Bank of Canada, noted:

‘Canada’s economy has more slack than previously thought. That’s the message from this morning’s data release by Statistics Canada. The industrial capacity utilization rate, i.e. ratio of actual output to estimated potential output, was revised down for the last three years much in line with earlier-reported GDP downgrades. In the third quarter, the capacity utilization rate fell to just 82.6%, the lowest in a year, due to declines in the manufacturing sector, construction and oil and gas.

‘Most sectors now have lower utilization rates than before the Great recession of 2008-2009. Of course, this larger-than-expected economic slack does not bode well for investment spending.’

With the Bank of Canada (BOC) looking set to take a more cautious approach to monetary tightening in the months ahead this all left the Canadian Dollar lacking in support on Thursday morning.

Oil Price Weakness to Limit Canadian Dollar (CAD) Exchange Rate Potential

Although signs increasingly point towards the Federal Reserve adopting a less hawkish policy outlook in 2019, limiting the appeal of the US Dollar, this has failed to shore up CAD exchange rates.

Unless oil markets see a significant recovery in the days ahead the appeal of the commodity-correlated Canadian Dollar is unlikely to improve markedly.

Worries over the global supply glut and reduced demand for oil could keep Brent crude trapped in the region of US$60 per barrel, even with an OPEC-led production cut in the pipeline.

With forecasts pointing towards an easing in next week’s Canadian inflation rate the mood towards the Canadian Dollar could sour further, as weaker inflation gives the BOC greater incentive to remain on hold.

Brexit Uncertainty Forecast to Keep Pound Sterling (GBP) Exchange Rates Under Pressure

Anxiety over Brexit is likely to keep the GBP/CAD exchange rate under pressure for the foreseeable future, barring any significant breakthrough with EU leaders.

As long as a sense of uncertainty persists the upside potential of the Pound will remain limited, especially if the odds of a general election or second referendum appear to increase.

Tuesday’s UK consumer price index data may put further pressure on GBP exchange rates, with investors anticipating a fresh uptick in inflationary pressure.

With the Bank of England (BoE) looking set to leave interest rates on hold for longer, thanks to Brexit-based uncertainty, higher inflation looks set to dent wages once again.

Any positive political developments, though, could encourage the GBP/CAD exchange rate to extend its recent uptrend.
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