Pound-Canadian Dollar Rate Looks for Foothold at 1.70 but May Test 2020 High on Brexit Breakthrough

- GBP/CAD rallies as risk assets soften, but stalls at 200-day average.
- Failure at 200-day average likely as 1.70-to-1.7124 range to prevail.
- But GBP could be bottoming as upside risks build around Brexit talks.
- Brexit breakthrough lifts GBP/CAD to 1.7424 with scope for 1.8078. 

A single oil pump jack in the farm field. Calgary, Alberta, Canada. Image © Adobe Stock

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The Pound-to-Canadian Dollar rate was risking a fall back to 1.70 Thursday where it could establish a foothold in the coming days, although the British currency could rebound to test 2020 highs again if progress in the Brexit negotiations is forthcoming during the months ahead.

Pound Sterling climbed against all major currencies including the Canadian Dollar on Thursday but pared gains over safe-havens like the U.S. Dollar and Yen as U.S. states began releasing their daily coronavirus statistics.

The U.S. has set new records this week with daily infections rising above 60k as the total number crossed three million.

"Initial US optimism at the open lasted all of 10 minutes, with stocks swiftly following their European counterparts into the red as ongoing uncertainty stifles sentiment," says Joshua Mahony, senior market analyst at IG.

Price action came as Brext negotiators confirmed that "significant divergences remain." The statement from the EU's Michel Barnier came with a pamphlet setting out the many technical changes to the commercial relationship that will take place at year-end with or without a trade deal.

The Brexit update came as investor risk aversion sent stock markets tumbling and revived a U.S. Dollar that had been deep in the red against major rivals, though the Pound-to-Canadian Dollar rate rose nearly half a percent to trade as high as 1.7136 after having climbed from 1.69 at the opening of the week. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 21, 55 (red) and 200-day (green) moving-averages. 

"The debate on Brexit and what happens at the end of the transition period should trump monetary policy in driving GBP in the coming months," says Adam Cole, chief FX strategist at RBC Capital Markets, who forecasts a Pound-to-Canadian Dollar average of 1.71 through to year-end. "As time ebbs away and two sides remain far apart the risks of no deal, or a deal on unfavourable terms for the UK are growing and H2 to see a continuation of GBP underperformance."

The Pound-to-Canadian Dollar rate was aided higher Thursday by weakness in the Loonie, which softened in sympathy with oil prices but absent a sharp rebound by the North American currency, Sterling could find itself establishing a foothold above 1.70 in the coming days. 

This is because the British currency could fall from 1.26 against the U.S. greenback to 1.24, more than unwinding this week's gains, although the Pound-to-Canadian Dollar rate would only fall as far as 1.70 if the USD/CAD rate was contained by the top of its anticipated range. 

"Our base case is that price action will remain contained within the 1.34-1.37 range in the near-term," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "Our PCA analysis suggests that the regime is shifting and that cross currency correlation strength is weakening at the margin."

Above: GBP/USD at daily intervals with 21, 55 (red) and 200-week (green) moving-averages, and USD/CAD (orange).

"We are in the early stages of moving towards a regime that favours domestic fundamentals rather than exogenous factors for determining direction for currency pairs – including USD/CAD. And in Canada, the domestic fundamentals don’t look good," Rai says.

Meanwhile, if a recovery of risk appetite carried GBP/USD up to the 200-day moving-average around 1.2690 that was nearly seen Thursday, while USD/CAD losses were limited to the bottom of its anticipated 1.34-to-1.37 range, the Pound-to-Canadian Dollar rate would find itself back at 1.70.

The Pound-to-Canadian Dollar rate stalled upon contact with its own 200-day average at 1.7124 Thursday, and a failure to better it by the New York close might be interpreted by technical analysts as a harbinger of a correction lower.

"We see USD/CAD moving to 1.3800 in Q3 as these risks play out. Technically, USD/CAD will have to pierce resistance at 1.3655 in order to reassert bullish momentum, with support at 1.3505," says RBC's Cole

Above: CAD/USD at daily intervals with Fibonacci retracements of March fall and WTI crude oil futures price (orange).

The various likely paths for each of GBP/USD and USD/CAD leave GBP/CAD trading within a 1.70-to-1.7112 range over the coming days in the absence of disproportionate strength or weakness in either Sterling or the Loonie.

Disproportionate Sterling losses might be unlikely given how it's recently become desensitised to mutterings between politicians about the prospect of a UK-EU trade relationship governed by World Trade Organization terms, which indicates that a generous dose of bad news may already be in the price. 

"Last night’s push through the 1.1350s for EURUSD then saw sterling firmly break above the 1.2610s, and we now have a market toying with a break above technical resistance in the 1.2650s. If we combine these GBPUSD technical achievements with EURGBP’s slip below the 0.8970-80s today, we think the sterling shorts are looking increasingly vulnerable to any sort of positive surprise on Brexit," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. 

Large losses might be ruled out in the short-term in the absence of significant Canadian Dollar strength, but a Pound-to-Canadian Dollar rate rally cannot be ruled out because there remains scope for progress toward a trade agreement with the EU during accelerated talks this month and otherwise, before year-end. Nor can an eventual request for an extension of the Brexit transition.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with 21, 55 (red) and 200-week (green) moving-averages. 

"GBPUSD price action looks modestly supportive on the longer run charts," says Juan Manuel Herrera, a strategist at Scotiabank. "Potential trend resistance above the market at 1.2677 is no more than that at this point so key resistance which is definable stands at 1.2810. We think the GBP may nudge a little higher in the short run but we think a break above 1.28 or below 1.23 in effect is needed to give a little more directional intent to this market."

A Brexit breakthrough could drive GBP/USD to 1.31 or above in a steady market for risk assets, which would lift the Pound-to-Canadian Dollar rate to 1.7424 if accompanied by Canadian Dollar strength that took USD/CAD down to 1.33.

However, Sterling would test 1.8078 and its 2020 highs in the event that a GBP/USD rally to 1.31 came alongside weakness in the Loonie that lifted USD/CAD to RBC's 1.38.

Only solid USD/CAD losses below 1.33 would be able to prevent such Pound-to-Canadian Dollar rate gains when quoted in a market where GBP/USD is targeting 1.31. The Pound-to-Canadian Dollar rate is effectively an amalgamation of USD/CAD and GBP/USD. 

"Yesterday's move from levels above 1.3600 to below 1.3500 over the span of about eight hours caught many in the market by surprise," says Greg Anderson, CFA and global head of FX strategy at BMO Capital Markets. "We don't think the big stops have gone off yet. They are likely to be found between 1.33 and 1.34. Pain seeking may yet take us there. If so, that will get spot USDCAD back into alignment with our model's fair value, which closed yesterday at 1.3402. It would also get USDCAD back into alignment with the BBDXY index."

Above: USD/CAD rate shown at weekly intervals with 21, 55 (red) and 200-week (green) moving-averages.