While Bank of England (BoE) Governor Mark Carney has repeatedly noted that UK interest rates could rise soon if UK economic growth continues at its current pace, the latest UK growth rate data fell short of projections and weakened the Pound Canadian Dollar exchange rate outlook.
GBP CAD began the week at the level of 1.6643. While the pair spent most of the week higher due to Canadian Dollar weakness, the pair fell below opening levels on Friday morning.
Pound (GBP) Outlook Slips on Disappointing UK Growth Data
Since September’s Bank of England (BoE) policy decision, speculation has flared up that the BoE is preparing to tighten UK monetary policy sooner than previously expected.
High-ranking bank officials have hinted that if Britain’s economy continues to grow at a decent pace, the bank may need to consider hiking UK interest rates, possibly even in the coming months.
On Friday morning, BoE Governor Mark Carney once again asserted that rates could be hiked in the relatively near-term future, but this heavily depended on the strength of UK ecostats.
As a result, investors were highly disappointed by Britain’s final Q2 Gross Domestic Product (GDP) results, which fell short of market expectations.
UK growth was projected to slip from 2% to 1.7% year-on-year in Q2. However, the results came in at 1.5% and the previous figure was revised lower to 1.8%.
The quarter-on-quarter data came in at 0.3% as expected, but investors were largely disappointed with the yearly results.
As Britain’s economy performed worse than expected in Q2, and the key services sector had seen a poor performance in July, investors became anxious that Britain’s economy may not be able to support tighter monetary policy from the Bank of England any time soon after all.
Still, the Pound could see stronger demand again next week, depending on Markit’s September UK PMIs.
If Markit’s PMIs beat expectations, it could indicate that Britain’s economy performed better than expected in September, boosting hopes for stronger economic performance in the second half of 2017.
However, if the data disappoints it could worsen concerns about the economic outlook which would also worsen the long-term outlook for Pound exchange rates.
Canadian Dollar (CAD) Investors Cool Following Bank of Canada Disappointment
The Canadian Dollar has seen a poor performance in recent sessions which has prevented it from losing much ground against a weaker Pound.
This has been largely due to lasting disappointment in last week’s Canadian inflation data, as well as the latest comments from Bank of Canada (BOC) Governor Stephen Poloz.
Poloz seemingly reacted to the underwhelming Canadian inflation data by indicating the bank would be taking a wait-and-see stance for a while.
This sudden shift in tone followed two successive and sudden interest rate hikes from the BOC since July.
Some investors had speculated that the bank’s tightening cycle would continue, leading to disappointment when Poloz indicated the bank’s run of rate hikes may already have ended.
Overall though, the Canadian Dollar outlook is optimistic. The currency recovered slightly against the Pound on Friday amid month-end flows and adjustments.
The ‘Loonie’ was also boosted by news that prices of oil, Canada’s most lucrative commodity, had risen since Thursday, largely due to the slowly improving oil market outlook.
Next week’s Canadian economic calendar could have a notable influence on the Canadian Dollar outlook too. Thursday will see the publication of Canada’s August trade report, followed by Canada’s September employment report on Friday.
If upcoming ecostats are decent, concerns about the economy could fade and the long-term outlook could improve.
GBP CAD Interbank Rate
At the time of writing this article, the Pound Canadian Dollar exchange rate trended in the region of 1.6627. The Canadian Dollar to Pound exchange rate traded at around 0.6010.
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