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GBP to CAD Exchange Rate Struggles to Recover as Rising Oil Levels Buoy ‘Loonie’

June 22, 2020 - Written by David Woodsmith

Fresh comments from the Bank of England (BoE) have not been enough to help the British Pound to Canadian Dollar (GBP/CAD) exchange rate to sustain this morning’s recovery attempts. The Pound outlook remains jittery due to coronavirus and Brexit concerns, while the Canadian Dollar continues to find support in strong oil prices despite mixed market demand for risk-correlated currencies.

Optimism over Canada’s fiscal policy and oil price outlooks knocked GBP/CAD last week. After opening the week at the level of 1.7041, GBP/CAD briefly edged higher to near monthly highs of 1.7172, before plunging in the second half of the week.

Ultimately, GBP/CAD closed the week at the level of 1.6802 after shedding a huge two cents. GBP/CAD briefly touched even lower this morning, tapping a quarterly low of 1.6753. At the time of writing, GBP/CAD is trending just above the week’s opening levels again.

Amid a quiet week for Canadian data, investors will be turning attention towards oil prices, coronavirus developments and UK data.

GBP Exchange Rates Struggle amid Coronavirus Fears despite Bank of England Comments

Investors have been hesitant to buy the Pound much lately. Various factors have been weighing heavily on the Pound outlook, keeping it broadly unappealing.

The UK government has been criticised for its handling of the coronavirus pandemic. Some UK data showing signs of resilience have not been enough to make the Pound appealing, as other factors indicate that the coronavirus could keep Britain’s economy underperforming for months to come.

This morning’s Bank of England (BoE) comments have not been enough to help the Pound to mount a stronger performance. BoE Governor Andrew Bailey indicated that the bank would not wait for higher interest rates to start withdrawing its quantitative easing (QE) programme.

Sterling’s reaction to the news was limited, due to concerns that the coronavirus pandemic would continue to impact Britain’s economy for some time.

Uncertainty over the government and Bank of England’s mixed stances on how to handle the coronavirus persist, even though downside risks have lightened slightly.

This has kept the Pound from benefitting more strongly, even though Brexit speculation has been a little more positive. According to Lee Hardman, Currency Analyst at MUFG:

‘Brexit and negative policy rate concerns have been two important factors which have weighed on the pound in recent months, so it was surprising that there wasn’t even a relief Pound rally as downside risks have eased’

CAD Exchange Rates Supported on Expectations of Stronger Oil

Market risk-sentiment has been mixed lately too. Rising fears that a ‘second wave’ of coronavirus infections is on the way has kept investors hesitant to take risks, limiting demand for assets correlated to risk and trade.

However, despite being a risk and trade-correlated currency, the Canadian Dollar has seen resilient performance over the past week. This is largely due to market optimism over oil markets.

Oil is Canada’s biggest export, so rising oil prices have supported Canadian Dollar strength.

What’s more, analysts and markets are expecting further gains in oil this week. These expectations are making it easier for the Canadian Dollar to hold its ground.

According to analysts at Bank of America (BofA), oil prices could be in for a strong period:

‘As we head into next year, we believe transportation demand could recover at a faster rate than we initially anticipated,

We also think that OPEC+ will likely hold back larger supply volumes than we anticipated three months ago.

A pattern of falling inventories across most regions should emerge as we move into H2 2020. As a result, we expect the full Brent crude oil curve to return into backwardation by year-end,’

GBP/CAD Exchange Rate Forecast: PMIs and Oil Prices in Focus

If oil prices do advance this week as some analysts predict, the Pound to Canadian Dollar exchange rate is more likely to remain under pressure.

Continued oil price strength means more strength for the oil-correlated Canadian Dollar. Even amid market risk-aversion and a lack of strong Canadian data, the Canadian Dollar could keep climbing if the oil market outlook continues to improve.

However, there is also potential for the Pound to advance in the coming sessions depending on Britain’s coronavirus outlook.

Tomorrow will see the publication of Britain’s June PMI projections. If PMIs beat forecasts, they will boost hopes that Britain’s economy is performing well amid the coronavirus pandemic and could even rebound.

However, if domestic infection concerns worsen this could dampen the impact of positive data. Of course, disappointing data could also weigh heavily on the Pound.

Developments in ongoing issues like the pandemic and Brexit could also influence market risk-sentiment and the Pound to Canadian Dollar exchange rate.
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