Pound Sterling / Canadian Dollar Weakness Means 2014 Exchange Rate Forecasts Now Being Questioned

By Gary Howes

The trend higher in the pound sterling to Canadian dollar exchange rate that has been in place since August 2013 is being questioned.

It has been a good few months for those holding out for better GBP-CAD exchange rates; the rate has been appreciating in a steady fashion since August 2013.

However, a recent period of weakness has now threatened the run higher, and calls into question the longer-term forecasts that see GBP-CAD as high as 1.87 in 2014.

Today has been a good day for the Canadian dollar exchange rate complex with a rally that was hatched following Wednesday's Bank of Canada meeting really starting to find its legs:

Pound sterling vs Canadian dollar forecast called into question

The solid technicals and fundamentals behind the sterling / Canadian dollar rate have meant that forecasting direction in 2014 has been relatively easy until now.

TD Securities have had a target of 1.94 in place for the rate and have maintained a bullish tone.

However, today's update from analysts does sound a little less certain:

"Sterling/CAD is under a little more obvious pressure today — the market has been blocked around 1.8550/55 and short-term trend support (since the start of the year) is yielding to pressure today.

"Trend momentum is weaker but still bullish but a soft close today (below 1.8450) will likely see GBP losses extend a li ttle further at least. We still rather think the market trend is higher though and we look for relatively limited losses overall. Key support is still distant at 1.7966."

Currencies: US dollar down, Euro up

The story of today is the Euro which has found a surge of fresh interest come its way following actions at the ECB today.

The euro soared to its highest level since late January after the ECB left lending rates unchanged and made no signal that it intends to ease policy any time soon.

"While acknowledging the dangerously low level of inflation in the euro zone, President Draghi said that inflation expectations remain “well anchored” over the medium and long term. The fact that the ECB did not make any adjustments to monetary policy or signal that any change is likely in the near future was a bit of surprise to many investors and sent the euro soaring to highs of the session across the board," says Omer Esiner at Commonwealth Foreign Exchange.

All this leaves the U.S. dollar on the defensive after softer than expected economic data yesterday once again clouded the outlook for Fed monetary policy going forward.

The slowest pace of services sector growth in four years last month and slower than expected private sector hiring dampened confidence in the U.S. recovery and raised some doubts about the outlook for further stimulus reductions by the Fed.

While weather likely continued to play a factor in the notable economic slowdown of late, the Fed could still opt to pause in its winding down of monetary stimulus, a potentially negative scenario for the U.S. dollar.