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Pound Canadian Dollar Firm on Positive UK Data

October 13, 2021 - Written by John Cameron

GBP/CAD Steady on UK GDP Increase

The Pound Canadian Dollar exchange rate is edging slightly higher today, recovering some of yesterday’s losses overnight.

Sterling is making gains on UK GDP and industrial production data, with GBP/CAD trading at 1.6956 at the time of writing.

Pound (GBP) Firms on UK Data

UK GDP growth and better-than-expected industrial production data bolstered the Pound this morning.

GDP data revealed the UK economy grew by 0.4% in August, up from an unexpected and downwardly revised July contraction of -0.1%.

According to the Office for National Statistics (ONS), the services sector grew by 0.3%, improving on a -0.1% drop the month before, and manufacturing expanded by 0.5% after July’s -0.6% decline.

Chief economist at Capital Economics, Paul Dales, said:

“The improvement in August probably had a lot to do with the fading of the restraint from July’s “pingdemic”, which at one point meant more than 1m people were self-isolating.
“And the recent broadening in shortages and the fuel crisis may mean that growth has come to a near-standstill since August.”

Rory Macqueen, principal economist at the National Institute of Economic and Social Research added:

”The reopening of the economy continued to support growth in August, with the popularity of domestic holidays contributing to 23% month-on-month growth for hotels and campsites in particular. The fact that consumer-facing services remain 5% below their peak suggests ample room for future catch-up in future too.
“Elsewhere a further fall in construction output may have been down in part to a reported increase in input costs: something likely to affect the economy more broadly if shortages lead to more generalised price rises over the autumn. The coming months could see something of a two-speed recovery, with sectors most affected by shortages in decline while others continue to recover.”

The Pound received further support from UK industrial production figures beating forecast at 0.8% growth in August, the biggest increase since March and up from July’s 0.3%.

Expectations of a Bank of England (BoE) interest rate hike also continue to underpin GBP exchange rates, as comments from some of the central bank’s policymakers hinted at tighter monetary policy and told households to get ready for ‘significantly earlier’ interest rate hikes.

Canadian Dollar (CAD) Buoyed by Soaring Oil Prices

The Canadian Dollar is holding its ground against many of the major currencies today, although it’s slightly down versus the Pound.

The oil-sensitive ‘Loonie’ remains well supported by crude prices holding near multi-year highs, with WTI above $80 a barrel.

CAD exchange rates also continue to strengthen on Canadian jobs data released on Friday as unemployment fell from 7.1% to pre-pandemic levels of 6.9%.

The rebound in employment combined with high inflation has fuelled speculation that the Bank of Canada (BoC) will tighten its monetary by cutting its bond-buying programme later this month.

BoC Governor Tiff Macklem commented on inflation, saying:

”We’re conscious that inflation has been above our target range for a few months.
“We expect it will be there through to at least the end of the year. Our margin of error on inflation is diminished.”

Expectations for tighter monetary policy are pushing Canadian bond yields higher, which in turn are supporting the Canadian Dollar.

Pound Canadian Dollar Forecast: Central Bank Rate Hike Speculation to Drive Movement

In the absence of notable UK data, the GBP/CAD exchange rate may be able to make up ground through the rest of this week if more BoE policymakers echo the views of their colleagues that an interest rate hike could be sooner than previously thought.

Pound gains may be capped, however, if tensions rise between the UK and EU on proposals for the Northern Ireland Protocol.

Canadian data is also thin through the rest of the week, with support for the ‘Loonie’ potentially coming from crude prices holding near recent highs.

At the same time, global inflationary pressures, supply chain problems, and soaring prices of natural gas threatening to cause energy crises could also stoke volatility in GBP/CAD.

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