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Pound Canadian Dollar (GBP/CAD) Exchange Rate Slides as Oil Surges 4.5% on US-Iran Tensions

Oil Price

Spike in US-Iran Tensions Drags on Pound Canadian Dollar (GBP/CAD) Exchange Rate as Oil Rallies

A sharp escalation in tensions between the US and Iran saw the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate slump as oil prices soared higher.

News that a US airstrike had killed high-profile Iranian general Qassem Suleimani prompted the price of oil to rally sharply overnight, with Brent crude rising more than 4.5%.

This gave the commodity-correlated Canadian Dollar (CAD) a solid boost against its rivals, even though the escalation in geopolitical tensions could weigh on global trade growth in the months ahead.

As Brent crude broke back above the US$69 per barrel mark CAD exchange rates made steady gains across the board, benefitting from the prospect of a significant supply disruption in the wake of the attack.

Coupled with the disappointing nature of the latest set of UK economic data this left the GBP/CAD exchange rate trending lower ahead of the weekend.

Contracting UK PMIs Weigh Heavily on GBP/CAD Exchange Rate

As December’s finalised UK construction PMI sank deeper into contraction territory, clocking in at 44.4, this limited the appeal of Pound Sterling (GBP).

Signs continue to point towards the economy having lost further momentum in the fourth quarter, raising the risk of a potential growth contraction.

Commenting on the report, Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, noted:

‘The construction sector crumbled again in December under the weight of Brexit and political uncertainty as pipelines of work continued to worsen and new orders dropped for the ninth consecutive month.’

While the construction sector only accounts for a small fraction of the UK’s economic activity this latest sign of weakness still left investors with little incentive to favour the Pound.

The mood of GBP exchange rates could sour further on Monday as markets expect to see a similarly underwhelming performance from December’s services PMI.

Another month of slowdown for the service sector could weigh heavily on the GBP/CAD exchange rate as the odds of a fourth quarter contraction grow.

Higher Odds of BOC Interest Rate Cut May Knock Canadian Dollar off Bullish Trend

Support for the Canadian Dollar may fade, however, thanks to the latest commentary from Bank of Canada (BOC) policymaker Carolyn Wilkins.

If Wilkins displays a willingness to cut interest rates this could drag CAD exchange rates lower as markets reassess the odds of future monetary loosening.

On the other hand, signs that the BOC could remain on hold for the foreseeable future would give investors fresh cause for confidence in the Canadian Dollar.

Monday’s producer price index data could also put a dampener on CAD exchange rates, with forecasts pointing towards a monthly contraction.

A -0.5% decline in the producer price index would raise the odds of a weaker consumer price index, suggesting that inflationary pressure within the Canadian economy remains lacklustre.

Even so, as long as the buoyance of oil prices persists this is likely to limit the potential for a GBP/CAD exchange rate recovery.