Published: August 2nd, 2023
The Pound to Canadian Dollar rate started this week facing significant technical resistance and attracting sellers in advance of this Thursday’s Bank of England (BoE) forecast update.
The Loonie settled into the middle of the G10 league table on Tuesday 1st August after a drop following publication of a forecast expecting economic contraction in Canada for the month of June.
Those losses lifted both GBP/CAD and USD/CAD on Monday 31st July but were recovered on Tuesday when FX analysts at RBC Capital Markets tipped GBP/CAD as a sell from 1.7026 in their Trade of the Week, pointing to this Thursday’s BoE decision and the current direction of travel for the US Dollar.
‘Our position is to be short GBP in either direction. Investors have priced in 90bp of cumulative rate hikes over the next five meetings, so the risk is a more robust move by Threadneedle Street this week. That could mean longer-term rate expectations will fall.’
RBC says that when ‘curve pivots’ like this occur it’s often linked to currency weakness. For that reason, the bank’s FX Strategy Unit is biased toward a stronger Greenback.
‘A stronger USD could mean CAD will outperform on the G10 crosses. It's also true that GBP/CAD is typically uncorrelated to global equity prices, which can be an attractive property.’
The Pound also softened against the Loonie on Monday when publication of UK credit figures showed the impact of rising interest rates on household incomes and consumer debt. The cost of new mortgages rose to 4.62 per cent in June while the rate on the overall mortgage book rose to 2.91 per cent.
In Mid-May Sterling gave back recent gains against the Dollar and Euro after publication of UK wage and employment data that indicated Britain’s labour market may have reached an inflexion point.
According to the UK Office of National Statistics (ONS), average UK earnings rose by 6.6 per cent in March, slightly less than the 6.7 per cent figure consensus had expected, but still a shade above April's 6.5 per cent.
With bonuses factored in, the figure was 5.9 per cent, which was anticipated and held the previous month’s level.
Bank of England (BoE) policymakers have been especially focused on wage data as they look for signals that UK inflation is becoming embedded. While the numbers are robust, Threadneedle Street may conclude that wage increases are close to reaching a peak, especially if unemployment continues to rise.
Alongside the wage rise, Britain’s unemployment rate increased to 3.8 per cent in March. Consensus had expected unemployment to remain unchanged at the previous month’s 3.7 per cent.
The data may signal that the hot UK labour market may finally be starting to cool, potentially giving the Bank of England breathing space to look again at concluding the current interest rate hiking cycle.
The Pound was unsurprisingly softer in the wake of the data release. The Pound to Dollar rate dropped 0.30 per cent in the 30 minutes following the release to 1.2474. The Pound to Euro rate fell 0.20 per cent in the same period, dropping to 1.1479.
In January, data from the final quarter of 2022 showed that Britain’s economy generated more jobs than anticipated, alongside faster-than-anticipated wage growth. Forex traders were surprised by the labour market growth and began to price in another interest rate hike.
Sterling rose after an additional 27K jobs were generated in the three months to 31st December 2022. That projection was unchanged from the previous month, but consensus believed a slowdown to 5K new jobs was in the works.
Unemployment was unaffected, holding firm at 3.6 per cent. People signing on for unemployment benefits rose by 19.6K, less than the 19.7K markets were expecting.
Average earnings including bonuses grew by 6.3 per cent, a rise from October's 6.1 per cent and beating expectations that a 6.2 per cent print would emerge. Take bonuses away and the rate of wage growth rises slightly to 6.4 per cent.
'GBP is trending slightly higher this morning following a mixed UK jobs print,’ said Barclay’s Forex Strategy Unit in a note to investors. ‘Even as vacancies fall, a shortage of qualified workers is forcing firms to raise pay. Wages are going up at the fastest pace since records began, turning the spotlight on the Bank of England, which may need to hike interest rates again.’
That sense of something new happening was echoed by the ONS, which wrote that current wage growth represented 'the largest rate we’ve seen for the private sector.’
For Threadneedle Street to re-think its policy of raising interest rates, employment and wage growth must come down. This would be seen as proof that the economy was cooling, easing domestic inflation pressures.
At the time, Barclays said the situation pointed to another 50 basis-point hike, followed by further increases.
The GBP/EUR rate was under pressure in early 2023 but saw a notable shift to bid after the labour market data print. Investors saw the figures as an indicator that the UK economy was in better shape than believed. GBP/EUR stood at 1.1289 in the hours after publication, having dipped as low as 1.1254 before the release.
In early January, traders were bearish on the Pound, but only insofar as coming US economic data provided inspiration for fresh bids on Greenback exchange rates.
‘A Dollar index move through 103.50 could be sufficient to move GBP/USD back through 1.2100, but it’s our view that the pair will finish the week below 1.2000,’ said Barclays in a January 2023 analyst note.
GBP/USD slid more than ten percent in the latter months of 2022 as gloomy forecasts for Britain’s economy and a reduced pace of Bank of England (BoE) interest rate rises relative to US Federal Reserve kept markets in bearish mode.