Pound-Canadian Dollar Outlook Favours Gains as Loonie Set for Consolidation

- GBP/CAD sell-off petering out as CAD consolidates
- Bottom in near 1.70 but oxygen thins near to 1.74
- Inflation, retail sales data in focus for GBP & CAD

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• GBP/CAD reference rates at publication:
• Spot: 1.7078
• Bank transfer rates (indicative guide): 1.6473-1.6590
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The Pound-to-Canadian Dollar exchange rate entered the new week on its front foot and may look to edge higher over the coming days as the Canadian Dollar cools its heels following a strong rally that has drawn scrutiny from the Bank of Canada.

Sterling was higher against all major currencies on Monday with GBP/CAD in the upper half of its latest trading range, which spans the gap between 1.69 and 1.72, as both it and the Canadian Dollar await key economic figures including the latest updates on inflation and retail sales.

Retail figures out over the course of the week will provide indication of the extent that economic recoveries are likely to live up to expectations in their earliest days, with both the UK and Canada reporting numbers for April on Friday.

Inflation data is out beforehand on Wednesday and will be scrutinised closely by the market, potentially inciting short-lived volatility where there are surprises of the order seen in U.S. data last week although the most important factor for GBP/CAD over the coming days could be the trajectory of USD/CAD.

“In the absence of a discernible theme driving markets right now, we think weight should be placed on central bank 'divergences', however modest they might be. That, we think, has helped to sustain CAD's resilience, though this could change,” says Mazen Issa, a strategist at TD Securities.

Above: Pound-to-Canadian Dollar rate shown at hourly intervals alongside USD/CAD.

Canada’s Dollar remained the outperformer of the major currency space for 2021 on Monday but could now be set to cool its heels for a period after Bank of Canada (BoC) Governor Tiff Macklem observed last week that further strength in the Loonie would risk disrupting parts of Canada’s economy.

Governor Macklem was quick to note the fundamental validity of the Loonie’s rally, which has come amid large gains for commodity prices including for Canada’s key exports like oil, but also stated that much further strength could disrupt other exporting sectors of the economy and would have to be taken into account by the BoC.

This means that further meaningful declines in USD/CAD could lead the bank to revise lower some of its bullish economic forecasts, which would then risk voiding or otherwise impairing the interest rate outlook that is responsible for having lifted the Canadian Dollar to the top of the major currency league table this year.

“Better two-way flow has developed in USDCAD after spot reached a six year low around 1.2050 this week. This is not too surprising – we expected as much in last week’s update – as the technical trend has started to look a little stretched,” says Shaun Osborne, chief FX strategist at Scotiabank.

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“We do not think the CAD rally has topped out, however. Indeed, we upgraded our CAD forecast this week and now look for spot to reach 1.19 later this year and touch 1.18 in the first half of 2022,” says Osborne.

The Canadian Dollar has rallied strongly throughout 2021 but especially since April 21 when the BoC cited economic resilience for a decision to pare back its quantitative easing programme before announcing upgrades to its inflation forecasts that indicated there scope for an interest rate rise as soon as the middle of next year.

The implication of Macklem’s speech last week however, is that although the BoC’s forecasts remain in place and Canada could yet be one of the first to lift interest rates coming out of the coronavirus crisis; USD/CAD may be on course for a period of sideways consolidation before any further declines.

A USD/CAD consolidation would be likely to have an uplifting influence on the Pound-to-Canadian Dollar exchange rate, which always closely reflects relative price moves in USD/CAD and the main Sterling exchange rate GBP/USD.

Above: Pound-to-Canadian Dollar rate shown at hourly intervals alongside USD/CAD.

The main Sterling exchange rate GBP/USD had edged 0.17% higher to 1.4105 on Monday while USD/CAD was also trading 0.17% higher but trading around 1.2110, which had lifted GBP/CAD by around 0.38% to 1.7082.

“GBP/USD has eroded 1.4018 and is on target for 1.4238/45, the recent high and the March 2018 high,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

A range of analysts have tipped the main Sterling exchange rate for continued gains over the course of the current week while Commerzbank’s Jones sees it going as far 1.4377 over the subsequent weeks which, when combined with a steady or sideways USD/CAD consolidation, would indicate sustained upside risks for GBP/CAD.

The Pound-to-Canadian Dollar rate would rise as far as 1.7397 during this time if USD/CAD remained around 1.21, although the latter may be unlikely in light of ongoing strength in commodity prices, which could eventually pull USD/CAD lower and curb the upside impetus of GBP/CAD before it gets as far as 1.7397.

“Technical cues from here will hinge on whether the GBP is able to push back above 1.7180 in the next day or so and whether the GBP rebound is sustained through the course of the week,” says Juan Manuel Herrera, a Scotiabank colleague of Osborne’s in a note early last week.

“A high close on the week would complete the third leg of a bullish “morning star” signal, following the heavy net losses for the GBP in the latter part of last month.”