Pound-Canadian Dollar Forecast: Recovery Curtailed as Lockdown Weighs Ahead of Election, BoE

-GBP/CAD recovery likely curtailed by new UK lockdown.
-Vulnerable amid increased volatility around U.S. election.
-Wobbly stock markets risk to CAD, Biden threatens GBP. 
-GBP eyes 1.7153, 1.7019 while as USD/CAD eyes 1.34.

Image © Adobe Images

• GBP/CAD spot rate at time of writing: 1.7201
• Bank transfer rate (indicative guide): 1.6570-1.6690
• FX specialist providers (indicative guide): 1.7000-1.7090
• More information on FX specialist rates here 

The Pound-to-Canadian Dollar exchange rate is vulnerable and could be set to slip lower over the coming days as Britain lurches toward another national lockdown at the beginning of what promises to be an action-packed and volatile U.S. election week for Sterling and the Loonie. 

Sterling climbed nealy one percent over the Canadian Dollar last week after being heartened by European confirmation of progress in Brexit trade talks, keeping alive market hopes for an agreement this November.

Brexit optimism enabled the Pound to rise through much of last week even as stock markets sold off and the U.S. Dollar rebounded further from earlier lows, although the GBP/CAD recovery may already be over. 

This is after Prime Minister Boris Johnson followed steps taken by some European counterparts last week by announcing another national lockdown for England that will run from Thursday 05 November until at least Wednesday 02 December, with supposedly non-essential businesses closed and movement outside of the home restricted.

"Even if the ECB is under yuge pressure, the BoE may be under even worse pressure. A new nationwide lockdown after a bizarre U-turn by Boris Johnson, unsolved Brexit negotiations and a clear disinflationary vibe despite an already very weak GBP. The Bank of England will accordingly have to go big already this week, and we bet on a GBP 150-200bn increase to the QE wallet, while the NIRP weapon will be saved until Q1-2021," says Martin Enlund, chief FX strategist at Nordea Markets. "GBP could be in for a rough ride."

Above: Pound-to-Canadian Dollar rate shown at daily intervals with selected moving-averages offering support.

The decision condemns the UK to a final quarter economic contraction while bringing the country into line with other major European economies that returned to lockdown last week, dealing a blow to the Euro and investor appetite for stocks in the process. 

Sterling and the Pound-to-Canadian Dollar rate didn't succumb to the weakness seen elsewhere in Europe as a result of that last week but are set to be the protagonists in this week's lockdown story.

And with the main exchange rate GBP/USD said to be susceptible to gravity that pulls it back down to 1.28 and then 1.27, GBP/CAD could be found trading first at 1.7153 and then 1.7019 if a number of Canadian and international lenders are right about USD/CAD heading up to 1.34 this week.

"Equity market trends are liable to remain a strong influence over the CAD—at the expense of most other factors, in all likelihood—in the near term. This leaves the CAD prone to significant swings—in either direction potentially—in equities as investors digest the results of the US elections," says Shaun Osborne, chief FX strategist at Scotiabank. "We think USDCAD may test 1.34+ in the near term while a sharp stock market drop will likely drive the USD even higher in the short run, perhaps meaning our 1.32 year end forecast is subject to overshoot risks. We remain negative in the USD in the longer run, however, and expect Q4 gains in the USD to reverse early next year." 

Some analysts are bracing for further strength in the U.S. Dollar ahead of Tuesday's U.S. election, which is a double-edged sword for the Pound and Canadian Dollar given that a U.S. administration led by Joe Biden might make a U.K.-U.S. trade deal less likely, while the Loonie is highly sensitive to stock markets that could be volatile this week.

Above: CAD/USD shown at daily intervals alongside S&P 500 index futures (black line, left axis).

The vote is widely expected to at least eventually give way to a further weakening of the U.S. currency but with President Donald Trump closing the polling gap in some key battleground states including Iowa and Florida during recent days, the prospect of a narrow loss for the incumbent followed by a legal contest may be rising. Furthermore, with some states not expected to begin counting mail-in votes until election day, investors may face a days long wait before the result is confirmed given unprecedented numbers of postal ballots. In this time, uncertainty could encourage a further U.S. Dollar rebound that weighs on both the Pound and Canadian Dollar. 

"As we head closer to elections we can see continued USD longs as volatility increases. DXY edges closer to the 94.00 resistance level," says Sarah Ying, a strategist at CIBC Capital Markets. "We are nearing the upper bound of our expected 1.30-1.34 range in USD/CAD, and may see a temporary overshoot.

Opinion polls give opposition candidate Joe Biden of the Democratic Party a commanding lead at the national level and as far as popular vote goes, while also showing him ahead in many battleground states, helping solidify a consensus expectation for a 'clean sweep' that sees the opposition Democrats take control of both houses of Congress.

The popular view is that a Democratic Party clean sweep will weigh on the U.S. Dollar and lift stock markets as well as risk currencies like the Loonie and Pound, although some analysts beg to differ with the idea that the presidential hopeful will be as positive for stocks as consensus thinking suggests.

Above: USD/CAD shown at daily intervals alongside Dollar Index (black line, left axis).