Volatility Forecast for the GBP/CAD Exchange Rate on Next Week’s EU Brexit Summit
This week has been a rather quiet one for the Pound, but markets will have plenty to chew over next week as investors assess whether progress in Brexit negotiations has (or hasn’t) been made at the EU summit.
Brexit negotiators will be zeroing in on securing the finer details of the proposed transition period, though many investors are concerned that this could leave the UK stuck inside the Customs Union with the EU for 2 years, effectively locking the UK out of trade deals with other nations and leaving Britain subject to the US trade tariffs.
Another serious sticking point is the avoidance of a hard border in Ireland and the rights of EU and UK citizens abroad and at home, with markets keen to hear if any progress has been made on either of these fronts.
Nonetheless, if the transition period is not effectively secured then Sterling could come under fresh pressure against the Canadian Dollar (GBP/CAD), with businesses in the UK desperate for better clarity regarding the UK’s post-Brexit prospects and markets petrified that a ‘cliff-edge’ exit could hurt the UK economy.
Tough Trade Talk from US and China Limits Canadian Dollar (CAD) Exchange Rate Outlook
The outlook for the Canadian Dollar is perhaps less gloomy, but still one of high risk.
The possibility of a protectionist trade war escalated on Thursday, with the Economic Advisor to US President Donald Trump, Larry Kudlow, echoing calls for a tougher trade stance against China.
Mr Kudlow added fuel to the fire by pointing out that a stronger response against China’s massive tariffs against the US (and their immense trade surplus) could be warranted.
Speaking to the press, he stated:
‘I must say that as somebody who doesn’t like tariffs, I think China has earned a tough response not only from the United States… A thought that I have is that the United States could lad a coalition of large trade partners and allies against China, or to let China know that they’re breaking the rules left and right’.
Beijing has threatened an ‘appropriate and necessary response’, repeatedly asserting that they will protect their interests, but whether this will extend beyond talk is highly debatable considering the fact that they already have massive sanctions and against the US.
Nonetheless, markets are worried that China could respond with greater tariffs, or that an escalation into a global trade war could severely limit volatile, commodity-based currencies like the Canadian Dollar.
US FOMC Rate Decision Looms – Pound and Canadian Dollar Exchange Rate Liable to Come under Pressure
Next week will also feature the highly anticipated US Federal Open Market Committee (FOMC) meeting, with investors still pricing in a rate hike despite the recent weaker-than-expected US wage growth readings.
This is relevant to the entirety of the markets, with a rate hike from the US Federal Reserve liable to send the ‘Greenback’ soaring – siphoning demand away from the Canadian Dollar and the Pound.
So how likely is a rate rise?
Analysts expect a 25% chance that the central bank will raise key short-term borrowing costs four times this year, up from the previous expectation of three.
This sentiment is reflected by New York Fed President William Dudley, San Francisco Fed President John Williams and Kansas City President Esther George, with bank Governor Jerome Powell also proving hawkish (calling for gradual rate raises this year) but not pointing directly to a rise in March.
It should be stressed, however, that US consumer prices inflation readings were slightly mixed in February, printing at 2.2% year-on-year and 0.2% month-on-month, down from January’s 0.5%.
Whether the overall robust performance of the US economy will be enough to negate the soft inflation readings remains to be seen.