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Why did Pound to Canadian Dollar Rate Forecasts Improve on the UK Election Announcement?

Pound Sterling Currency Forecast

The Pound to Canadian Dollar exchange rate has seen a significant surge in demand this week. GBP CAD soared to 1.72 following a surprise announcement that Britain would be holding its next general election on the 8th of June.

This allowed Sterling to easily capitalise against a weak Canadian Dollar, which has been held back by poor oil price news as well as a lack of strong domestic data this week.

GBP CAD opened this week at the level of 1.66, meaning it has gained around five cents in just three days, taking the pair to its best levels since September 2016.

But why has the Pound benefitted so significantly from confirmation that a UK general election will be held in June? It is largely due to the market belief that an increased majority for the ruling Conservative party will lighten Brexit uncertainty.

When UK Prime Minister Theresa May took her role following the Brexit vote last year, she was the unelected successor to outgoing PM David Cameron. This has been a major source of contention from her opponents.

May argues that getting a voter mandate will improve stability in the nation, while analysts believe May’s reason for calling an election is to make use of weakness in opposition to increase her party’s majority and make it easier for her to push forward her vision of Brexit.

Either way, if Theresa May’s Conservative party pulls off a big win in the coming election the party will have the freedom to argue for Brexit negotiation extensions.

Britain is currently on track to leave the EU in March 2019, but if the UK and EU agree to extend negotiations they could continue into 2020 or later. A 2017 election win for May’s government means the next election wouldn’t be until 2022, with no 2020 election applying pressure near the end of Brexit negotiations.

Some analysts also believe Theresa May is still being intentionally unclear about her Brexit goals. As May has refused to rule out loss of EU free movement by 2020, some analysts have suggested that May could even use a stronger electoral mandate to improve her negotiation force and fight for a softer Brexit.

However, others argue that an increased mandate would mean that May’s previously proposed ‘hard Brexit’ will have even less opposition.

Regardless, the Pound’s long-term outlook has improved significantly and depending on the results of the election it could strengthen even further.

The high potential of increased control in May’s Conservative government allowing for a smooth Brexit process with minimal opposition has improved optimism in markets that the UK’s Brexit pains could be minimised.

On the other hand, an upset in the election could cause Pound instability and uncertainty to rise once more. For example, if the Labour party sees a surprise surge in popularity.

The Canadian Dollar’s long-term outlook remains mixed. Prices of oil, Canada’s most lucrative commodity, continue facing pressure from high US oil production and slowing demand.

While the Bank of Canada (BOC) has recently been a little more optimistic on Canada’s economy, domestic and geopolitical uncertainty is still too high for investors to surge on long-term ‘Loonie’ bets.

 

At the time of writing this article, the Pound to Canadian Dollar exchange rate trended in the region of 1.72. The Canadian Dollar to Pound exchange rate traded at around 0.58.