GBP/EUR: Pound Edging Higher Ahead Of BoE Policy Announcement

The Canadian dollar continued to strengthen versus the US dollar for the seventh straight week last week. The Canadian dollar extended its gains by a further 0.1%, totalling gains of over 2%. The Canadian dollar is advancing versus its US counterpart as trading kicks off for the new week.

The US dollar traded broadly higher versus its major peers, although lower versus the Canadian dollar at the end of last week as investors weighed up weaker than forecast US ISM manufacturing data against increased flows into safe haven assets amid the escalation of tensions in the Middle East.

Data showed that activity in the US manufacturing sector contracted at the fastest pace in over a decade in December. The closely watched manufacturing ISM index dropped to just 47.2, compared to 48.1 in November. Analysts had been expecting a slight improvement to 49. The figure 50 separates expansion from contraction. The weak reading suggests that the slump in the US manufacturing sector is showing no signs of letting up.

The sector has been on the decline for a year amid the US – China trade dispute. However, with the two powers set to sign a trade deal in the coming weeks, investors are hoping that the thawing in relations will help lift the sector going forward.

Whilst weak data weighed on the US dollar, rising tensions between the US and Iran boosted flows into safe havens such as the greenback. With Iran vowing to retaliate and Trump identifying targets in Iran, investors will be watching closely to see how the situation develops.

Canadian Dollar To Focus On Middle East

The Canadian dollar advanced versus all major rivals except the Japanese Yen across the previous week, supported by rising oil prices. West Texas Intermediate closed on Friday 3% higher at $63 amid growing tensions between the US and Iran following a Trump ordered airstrike which killed Iranian general Qassem Soleimani. Oil has jumped over 1.3% on the open in the Asian session.

The risk of retaliation on Saudi Arabian soil is high meaning that oil will trade with a risk premium for the time being. This is keeping the commodity sensitive Canadian dollar elevated.

There is no high impacting Canadian economic data for investors to digest. Instead, Canadian dollar investors will be watching the unfolding situation between the US and Iran closely.


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