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Pound-Canadian Dollar Week Ahead: Supported on Charts but Brexit, Lockdown Exit Risks Loom

- GBP/CAD tipped to retain upside bias in weeks ahead.

- To find support at 1.73, 1.7250 and 1.69 range-bottom.

- But fundamental risks lurk on the path ahead of GBP.

- Brexit 'cliff edge' risk returns, lockdown exit risk looms.

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- GBP/CAD spot at time of writing: 1.7393
- Bank transfer rates (indicative): 1.6777-1.6898
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The Pound-Canadian Dollar rate was little changed last week after more sideways trading in both risk-off and risk-on conditions, although it remains supported by a cluster of nearby moving-averages on the charts and is tipped by technical analysts to retain an upside bias in the weeks ahead.

Riskier currencies like Pound Sterling and the Canadian Dollar were on the back foot ahead of the weekend although losses were about even when the two were stood next to the greenback, which kept the Pound-Canadian Dollar alternating between small fractional gains and losses. Price action came amid another day of increases for Brent and WTI crude oil futures as well as North American stock markets including those in Canada. 

The Pound-Canadian Dollar rate has traded within a wide 8.6% range that spans the gap between 1.65 and 1.80 in recent months but had on Friday gained only 0.76% for 2020, in large part due to the so-far indiscriminate destruction wrought on countries, peoples and economies by the coronavirus. But the market's distinction between Sterling and typically riskier commodity currencies has lessened since the coronavirus crisis compelled the government to dig deep into already stretched and worn pockets.

This has left Sterling unable to sustain gains over the Loonie this year but the sideways movement is tipped to come to an end in the months ahead, from both a technical as well as fundamental perspective, with many Canadian firms anticipating a breakout to the upside from the Pound-Canadian Dollar range. But the lesser distinction between Sterling and riskier commodity currencies might mean a UK-specific catalyst is required for this to happen.

"We continue to view the longer-term trend as higher for the GBP and note that daily, weekly and monthly trend signals are aligned bullishly for the cross. This should help limit near term losses for GBPCAD. We remain cautiously constructive on the outlook for the pound here," says Juan Manuel Herrera at Scotiabank. "A clear and sustained break above 1.78 would be technically positive for the GBP— but that also looks highly unlikely in the near term."

Herrera also says the Pound should find support on the 40-day moving-average located around 1.73 in response to any weakness in the days ahead and tips 1.69 to act as "major support". There's also the 55-day and 200-day moving averages sitting between 1.73 and 1.69, which could both act as support on the way down if the rug is pulled out from beneath the feet of Sterling.  

Above: Pound-Canadian Dollar rate shown at daily intervals alongside selected moving averages.

Many anticipate a breakout from the 1.68-1.80 Pound-Canadian Dollar range in the months ahead but this is at a time when Brexit headwinds are about to haunt the British currency all over again and as the UK risks sticking out like a sore thumb among major economies if a shortage of testing kit and essential personal-protective-equipment for everybody including 'key workers' leads it to be slower exiting 'lockdown' than its developed world counterparts. 

Some UK businesses that were never instructed to close have this last week begun to reopen and motor vehicle traffic has ticked fractionally higher, but the government has so-far refused to set out a plan for reopening the economy and is at the bottom of the developed class when it comes to coronavirus testing. It said in early April that 100k tests would be carried out per day by month-end but has failed to get meaningfully above the 20k level. 

Furthermore, and as other countries specify face masks or "coverings" as essential for citizens exiting lockdown, many frontline workers in not only the health service but also the other emergency services, still lack basic items of protective kit like respiratory masks. The government has congratulated itself for the kit which it has provided while acknowledging that "We also went into this crisis without a large-scale domestic PPE manufacturing industry to draw on."

"With market attention now turning away from the trajectory of epidemiological curves and towards exit strategies, three observations make us very worried about the UK. The first is that testing capacity is very poor," says Oliver Harvey, a strategist at Deutsche Bank in a note to clients last week. "The second is that overwhelming public support for hard lockdowns, and relatively elevated risk perception levels of the danger of the virus, will make it difficult for the government politically to exit the lockdown without the test and trace capability. The third is that the British economy is on a relative basis heavily exposed to the virus, due to the large share of consumption in GDP. These three factors make us concerned that the hit to UK growth will be relatively harder than other economies, and be structurally bearish for GBP."

Above: Pound-Canadian Dollar rate shown at weekly intervals with Fibonacci retracement of 2016 downtrend marked out.

Prime Minister Boris Johnson returns to work Monday after his own battle with coronavirus and will come under intense pressure from all corners, potentially including the market, to set out a plan to reopen the economy. This is as other countries increasingly look to return to some semblance of normality and at a time when Brexit also looks likely to return as a headwind for the currency.

UK and EU negotiators said Friday that only "limited progress was made" in bridging differences at the end of the first round of Brexit negotiations to take place since the onset of the coronavirus crisis in Europe, which brings into focus an end-June deadline for the UK to extend the Brexit transition period beyond December 31, which is just less than nine weeks away.

A lack of progress in the negotiations risks stoking fresh fears over a ‘no deal’ Brexit ‘cliff edge’ and a return of the associated ‘risk premium’ that dogged Sterling last year and on many other occasions since the referendum.

"There are two reasons why a "WTO Brexit" in some form or another is looking more likely. The first reason is that the UK government needs all the flexibility it can get and, let's face it, EU membership and the term "flexibility" are not exactly synonymous with one another. The second reason is that, in the current economic climate, most countries will want to continue trading with the UK with or without a free trade agreement in place," says Stephen Gallo, European head of FX strategy at BMO Capital Markets, in an April 17 note to clients.

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