Pound-to-Canadian Dollar Rate Tipped to Stabilise after Reclaiming Key Levels

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The Pound-to-Canadian Dollar rate was in recovery mode Wednesday after reclaiming its 200-day moving-average and is tipped by technical analysts for a period of recovery following weeks of punishing declines. 

Sterling has risen almost a full percent against the Loonie this week amid robust risk appetite and improving sentiment toward the British currency after Brexit negotiators agreed to continue trade talks through summer.

This has enabled the Pound-to-Canadian Dollar rate to stabilise above its 200-week moving average at 1.6984 and to reclaim both its 200-day moving-average as well as the 1.71 handle on Wednesday. Both averages could now offer meaningful support to the Pound. 

Price action came ahead of the June Federal Reserve (Fed) policy update that will be key to risk appetite heading into the weekend, and amid stability that follows weeks of punishing declines for the Pound-to-Canadian Dollar rate. Technical analysts say this adds to the odds of a more protracted recovery for Sterling, more so if it can establish a foothold above Wednesday's 1.71 level. 

"Three weeks of sideways trading in a relatively narrow range are adding to the evidence we noted last week that a base is developing now. The 200-day MA is blocking GBP gains, however, and trend strength signals are weak on the daily DMI and mixed across other timeframes. We are leaning a little more constructively towards the GBP and continue to feel that the GBP may move up to the 1.73/1.7350 area if a foothold above 1.7110 is achieved," says Juan Manuel Herrera, a strategist at Scotiabank. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 200-day moving-average.

The decision to extend Brexit trade talks removes an artificial deadline from the path of the Pound but there's still a deadlock that will loom over the currency through summer while before then, the market's focus returns to the domestic economy this week with the release of GDP data for April, the first full month of 'lockdown' for the economy, on Friday at 07:00. Consensus is for a -18% month-on-month decline from the services heavy economy.

Friday's data will be released as the government struggles to get the nation's schools to reopen after plans for a complete return of all children by September were called into question this week. The government has stepped up efforts to reopen the economy in recent weeks, leading the UK to close the gap between it and developed world rivals, although any recovery could be constrained if schools were not to fully reopen for months. 

"The government's decision to shelve plans to reopen primary schools fully later this month will ensure that GDP remains greatly below its pre-coronavirus level throughout the summer months. School closures damage GDP directly, by lowering output in the education sector, and indirectly, by preventing parents with young children from going to work. Both impacts are considerable," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "School closures likely depressed GDP by 8% in April, by hitting education output and limiting labour supply. Pupils' low return rate in June and delayed further reopening plans point to a lingering 7% GDP hit." 

GDP data and botched reopening of schools come amid a rally in the Pound and a week out from the June Bank of England (BoE) policy update that's widely expected to herald an increase in the bank's quantitative easing programme.

The danger for Sterling is the BoE goes further than markets expect it to or that it seeks to keep the discussion about negative interest rates alive. So while Sterling has the wind in its sails this week it may not be long before domestic headwinds are leaning against it again.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with 200-week moving-average.