Pound-Canadian Dollar Rate Seeks to Sustain Break Higher as BoC Looms

- GBP/CAD support near 1.7230 amid break higher
- CAD near April lows Vs USD as BoC decision looms
- Tapering, forecasts & market expectations in focus

Image © Bank of Canada

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The Pound-to-Canadian Dollar rate enters the new week attempting to sustain a break higher out of a multi-month range although whether it can will be determined over the coming days by the July policy decision from the Bank of Canada (BoC) and commentary Federal Reserve (Fed) officials.

Sterling entered the new week carrying a five-day gain of more than two percent against the Canadian Dollar after volatility in prices of oil, other commodities and strength in the U.S. Dollar pushed the Loonie to its lowest level since April against the greenback.

Weakness in the Loonie meant the Pound-to-Canadian Dollar rate has been able to rise comfortably above the 1.7250 area that had barred its path higher for ten weeks previously to trade above 1.7300 on Monday.

These are Sterling’s best levels for nearly three months although whether they can be sustained depends heavily on the BoC’s latest statement and set of quarterly forecasts due out at 15:00 London time on Wednesday.

“We think recent activity data have been in line with the BoC’s April forecasts,” says Josh Nye, a senior economist at RBC Capital Markets.

“Domestically, virus and vaccine developments have been almost unambiguously positive since April’s MPR—from accelerated vaccine rollout and strong uptake, to the slowest case growth since last summer—which should support an acceleration in growth over H2/21,” Nye adds.

Above: GBP/CAD at daily intervals with key moving-averages and Fibonacci retracements of March fall.

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Wednesday’s decision is widely expected to result in a further reduction to the value of the BoC’s weekly bond purchases under its quantitative easing programme (QE), from $3bn per week to $2bn.

However, what may have the greater impact on the Pound-to-Canadian Dollar rate Wednesday however, is what if anything the bank says about market expectations for its 0.10% cash rate.

“An upward revision to forecasts as part of the MPR could see the Bank’s estimate for the timing of the first rate hike pulled forward slightly. Currently the bank’s rate guidance suggests that output gap may close, and the first rate hike may prove appropriate, in 2H 2022,” says Brian Daingerfeld, head of G10 FX strategy U.S. at Natwest Markets.

Tapering would be a supportive outcome for the Canadian Dollar and a potential weight on GBP/CAD from mid-week.

However, with investors wagering the BoC will lift its 0.10% cash rate as soon as April 2022 and the BoC’s guidance suggesting that a rate rise is unlikely before year-end 2022, the Loonie and GBP/CAD will also be sensitive to whether the bank maintains or shifts its position there.

“There's little reason for the BoC to pull back market pricing on next year's hike,” says Mark McCormick, global head of FX strategy at TD Securities.

“Yet, much of that has already been priced in - at least on the FX side. We have been arguing for some time that there was too much optimism priced into CAD,” McCormick adds.

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If the BoC’s guidance on how soon it expects Canada’s economy to be in a position where it can sustainably deliver a 2% inflation target moves in favour of market expectations then it could inspire a recovery by the Canadian Dollar and potentially compromise GBP/CAD’s break higher.

However, and given the strength of existing market expectations, some analysts say the Canadian Dollar is unlikely to draw much further support from anything the BoC is likely to say or do this week, which implies limited risk to GBP/CAD from Wednesday’s meeting.

“We expect the BoC to taper its asset purchases by $C1bn/week to $C2bn/week,” says Joseph Capurso, a strategist at Commonwealth Bank of Australia. “We expect the stronger USD to be the dominant driver of USD/CAD this week, and see further gains as likely.”

With the BoC and this week’s UK economic data aside, the most significant driver of the Pound-to-Canadian Dollar exchange rate over the coming days is likely to be the trajectory of the U.S. Dollar and its response to Wednesday’s 17:00 testimony by Fed Chairman Jerome Powell to Congress.

The Pound-to-Canadian Dollar rate has mostly-positive correlation with USD/CAD and the U.S. Dollar Index, so would likely rise with both of these if Chairman Powell’s testimony does anything to confirm or vindicate the market’s view that the Fed is itself moving closer to tapering its quantitative easing programme.

Above: USD/CAD at daily intervals with key moving-averages and Fibonacci retracements of April fall, alongside GBPCAD.