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Pound Canadian Dollar Muted as UK Firms Hit by Soaring Costs

November 23, 2021 - Written by John Cameron

Pound Canadian Dollar (GBP/CAD) Exchange Rate Lacks Direction on Mixed UK PMIs

The Pound Canadian Dollar exchange rate is subdued so far this week as UK manufacturing and services PMIs bettered forecasts, but indicated record-high input costs, and oil prices soften again after a brief bounce yesterday.

After edging higher yesterday to above CA$1.70, the GBP/CAD exchange rate is trading sideways at CA$1.7006 at the time of writing.

Pound (GBP) Struggles as UK PMIs Reveal Record High Input Inflation

The Pound (GBP) is lacking traction against the Canadian Dollar today amid strength in its peers despite the UK’s manufacturing and services PMIs for November coming in above forecasts.

Growth in the service sector indicated another strong month of expansion with a reading of 58.6, down on last month’s unexpected 59.1 figure, but slightly better than forecasts of 58.5.

The data revealed new order growth hit a five-month high, while export sales rose at the fastest pace in approximately three-and-a-half years.

Meanwhile, the manufacturing sector grew more-than-expected to a reading of 58.2 in November, up from 57.8, and indicated the strongest expansion in factory activity in 3 months.

However, supply chain pressure and staff shortages prevented further growth.

Input costs surged to a record high across both sectors as higher wages, and rising energy and material costs pushed inflation to its highest level since the index began over 20 years ago.

Chris Williamson, Chief Business Economist at IHS Markit, said:

“Encouragingly, an acceleration in growth of new business hints that December should bring a strong end to the year, meaning the fourth quarter should see a welcome pick up in GDP growth after the slowdown seen in the third quarter.

“A record increase in firms’ costs will meanwhile further stoke fears that inflation will soon breach 5%, with lingering near-record supply delays adding to indications that price pressures may show few signs of abating in the near-term.”

Concerns over soaring price pressures appear to have weighed on the Pound on Tuesday despite the signs of economic growth in the data.

Canadian Dollar (CAD) Dented by Declining Oil Prices

The oil-sensitive Canadian Dollar is slipping today as oil prices decline again after a brief bounce yesterday.

WTI crude prices have retreated back to $75 a barrel after climbing above $76 at the start of the week.

Reports that the US plans to release its crude reserves, along with China, Japan and Japan to cool the market and lower energy prices has sent oil prices lower.

Surging Covid-19 cases in Europe threatening to cause more restrictions and lockdowns has also weighed on expected demand.

WTI crude prices had risen yesterday after OPEC+ continued to dismiss calls to increase output, and sparked speculation they could adjust higher planned production if the crude reserve releases go ahead.

Pound Canadian Dollar Forecast: Failing Oil Prices to Support GBP/CAD?

Soaring Covid-19 infections across Europe look likely to continue cause some volatility in the Pound Canadian Dollar exchange rate.

With a fourth wave sweeping Europe, the threat of spreading to the UK remains although the country’s high vaccination rate may limit the impact.

At the same time, as more European countries impose restrictions and lockdowns, demand for oil will likely drop and in turn dent the oil-sensitive Canadian Dollar.

In addition, any progress on plans of major countries releasing their oil reserves would weigh on CAD exchange rates by lowering crude prices.

Central bank rate hike speculation will also drive movement in GBP/CAD.

Bank of Canada (BOC) Deputy Governor Paul Beaudry is scheduled to speak later and any signals of further monetary tightening may lend support to the ‘Loonie’.

Meanwhile, after Bank of England (BoE) Governor Andrew Bailey struck a more cautious tone on raising interest rates at the weekend, further comments from the central bank’s policymakers could drive additional movement in the Pound.

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