Near-Stagnation in UK Services PMI Dents Pound Sterling Canadian Dollar (GBP/CAD) Exchange Rate
The mood towards Pound Sterling (GBP) soured further on Wednesday as June’s UK services PMI showed a near-stagnation in activity, rounding out a trio of disappointing surveys.
As the PMI dipped from 50.9 to just 50.1 this raised fresh concerns over the outlook of the UK economy, coming on the heels of a contraction in both the manufacturing and construction sectors.
With the odds increasingly pointing towards the second quarter gross domestic product showing a decline in growth the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate naturally slumped.
Commenting on the data, Chris Williamson, Chief Business Economist at IHS Markit, noted:
‘The near-stagnation of the services sector in June is one of the worst performances seen over the past decade and comes on the heels of steep declines in both manufacturing and construction. Collectively, the PMI surveys indicate that the economy has slipped into contraction for the first time since July 2016, suffering the second-steepest fall in output since the global financial crisis in April 2009.’
Ongoing anxiety over the outcome of the Conservative leadership contest added to the bearish mood of GBP exchange rates, given the uncertainty already dragging on the economy.
Surprise Trade Surplus Boosts Canadian Dollar (CAD) Appeal
Demand for the Canadian Dollar (CAD), meanwhile, improved on the back of an unexpectedly positive month of trade data.
Defying forecasts, the Canadian trade balance reversed the previous month’s deficit to deliver a surplus of 0.76 billion as export volumes picked up sharply.
This turnaround suggests that ongoing global trade tensions are failing to constrain the Canadian economy, to the benefit of CAD exchange rates.
However, the Canadian Dollar looks vulnerable ahead of Friday’s raft of labour market data as markets anticipate an uptick in the unemployment rate.
If unemployment rises as forecast this would give the Bank of Canada (BOC) greater incentive to take a dovish outlook, leaving the Canadian Dollar exposed to fresh selling pressure.
On the other hand, an increase in average hourly wages may help to support CAD exchange rates in the short term.
Political Anxiety Forecast to Keep GBP Exchange Rates Under Pressure
Although some weeks remain before the ultimate result of the Conservative leadership contest political anxiety is likely to keep the Pound on the back foot.
With neither Boris Johnson nor Jeremy Hunt ruling out the possibility of the UK crashing out of the EU without a deal markets see little cause for confidence regardless of the result.
Unless either candidate demonstrates a willingness to adopt a softer outlook on Brexit the fear of a no-deal scenario could continue to limit the strength of the GBP/CAD exchange rate.
Friday’s Halifax house price index could put additional pressure on the Pound, with forecasts pointing towards a -0.4% contraction on the month.
Fresh evidence of a weakening housing market would add to existing concerns over the health of the UK economy, keeping GBP exchange rates biased to the downside.