Pound-Canadian Dollar Week Ahead Forecast: Eyeing 1.7780 as Sterling Shines, and Loonie Lags

- GBP/CAD eyeing 1.7780 amid GBP outperformance.
- Rally extends amid signs of reserve manager interest.
- After BoE plays it cool, vaccine rollout hits milestone.
- CPI, PMIs and retail sales data in focus for GBP, CAD.

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• GBP/CAD spot rate at time of writing: 1.7602
• Bank transfer rate (indicative guide): 1.7000-1.7124
• FX specialist providers (indicative guide): 1.7353-1.7494
• More information on FX specialist rates here

The Pound-to-Canadian Dollar rate was on its front foot on Monday but could have scope to achieve six-month highs near to 1.78 this week if Sterling's nascent outperformance and a broader uplift of European currencies continues while the Loonie remains a laggard.

Sterling was higher against most major currencies to open the week and remained the best performer of 2021 while the Canadian Dollar has lagged other risk and commodity-sensitive currencies, potentially owing to its relationship with the Euro and U.S. Dollar Index. 

Correlations for Europe's single currency and the Dollar Index, with risk assets like stock markets, have become inconsistent in recent weeks while the influence of the Chinese Yuan on other major currencies appears to have increased. The Canadian Dollar has been gripped almost by inertia, having gotten little support from a 5% increase in oil prices, while Sterling has continued to lead the major currency pack higher.

"GBP could see its fair share of renewed reserve manager interest now that hard Brexit risks are in the rear view mirror," says Richard Franulovich, head of FX strategy at Westpac. "This could provide a further tailwind."

The Pound has been aided by a brightening domestic backstory as well as what looks like an ongoing bid from central bank reserve managers. 

Above: Pound-to-Canadian Dollar rate at daily intervals with Fibonacci retracements of 2020 fall and USD/CAD( blue).

"Short-term price signals do suggest a possible top in development on the hourly chart," says Shaun Osborne, chief FX strategist at Scotiabank. "The Federal government’s relatively slow vaccine roll out leaves the country lagging its peers to some extent (on par with some larger European economies but well behind the US and UK) which may leave the CAD struggling to take fuller advantage of the strength in raw material prices until this situation improves. Our week-ahead model projects more range trading around the mid-1.27 point." 

The Pound-to-Canadian Dollar rate had reclaimed the 1.76 handle on Monday and was up 1.26% for 2021 but with the main Sterling exchange rate GBP/USD tipped for a break above 1.40 in the coming days, there risks are to the upside for the Pound this week. GBP/CAD would trade as high as 1.7780 this week if GBP/USD reached 1.40 while USD/CAD oscillated around the 1.27 as is envisaged by strategists at Scotiabank. 

"In due course can see resistance at 1.4091 next with our first major objective at 1.4302/77 – the key 2018 highs and 50% retracement of the 2014/2020 bear trend – which we expect to cap for a fresh consolidation phase. Big picture though, we continue to look for an eventual move to 1.49/1.51," says David Sneddon, head of technical analysis at Credit Suisse.

There has been a central bank bid for the Pound and one that may need to be sustained if the rally in European currencies is to endure following last year's sharp gains for the Euro and neighbouring currencies, as well as objections of the European Central Bank (ECB) et al to exchange rate appreciation. This could be why Sterling, the Canadian Dollar and some other currencies now appear to have a closer relationship with a resurgent Chinese Yuan, which is also having a supportive influence on the Euro.

Above: Pound-to-Canadian Dollar rate at daily intervals with Fibonacci retracements of 2020 fall and USD/CAD( blue).

"Whereas Euro strength drove most of the early Dollar weakness, appreciation pressure on the Yuan has been a more important factor since mid-summer," says Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs. "Macro fundamentals for the Yuan continue to look solid. Most importantly, relatively high yields (especially for a low-vol currency) and strong domestic equity performance are encouraging remarkably high portfolio inflows from international investors. Compared to other countries, Chinese policymakers may also have a bit more tolerance for TWI appreciation with the economy further along in its recovery."

Yuan strength has been more supportive of the Pound than the Loonie, which may have to do with Sterling's 15% weighting in the trade-weighted Euro. To the extent that Yuan strength remains on show through the Lunar New Year this week it would be supportive of GBP/CAD, although appetite for both Sterling and the Canadian Dollar will be tested by a raft of economic data also.

January's inflation data is due out from the UK and Canada on Wednesday at 07;00 and 13:30 respectively while retail sales figures for December are set for release at the same times on Friday. PMI surveys measuring changes in activity in the UK's services and manufacturing sectors during February are also expected at 09:30 on Friday and could have an impact on the Pound. 

"In the US, we’re expecting an across the board week of positive economic reports, with healthy readings for industrial production, housing starts and retail sales, although none of them seem likely to be outside the consensus range. Not bad for the middle of a pandemic. But we’ll also hear from an uber-dovish Fed, both in speeches and in the minutes of the prior meeting. The question is, how long can they hold onto their increasingly unrealistic view that the economy will need zero interest rates for three more years," says Avery Shenfeld, chief economist at CIBC Capital Markets. "In Canada, factory shipments may have rebounded in December, but there will be less to cheer about in what looks to have been a lump of coal in retailers’ stockings that month. That report should include a “flash” reading for January, and it’s hard to see good news in a month in which many non-essential retailers were impacted by Covid lockdowns. We’re looking for a rebound in 12-month CPI readings, including a one tick climb in the common component core rate, but a report that will still leave underlying inflation tracking at too tame a pace for the Bank of Canada’s liking." 

Above: Pound-to-Canadian Dollar rate at weekly intervals with Fibonacci retracements of referendum fall in 2016.