Pound-Canadian Dollar: "Still Decent Underlying Bull Momentum" says Scotiabank

- GBP/CAD finding support at 100-day average & key Fib level
- Consolidates above 1.7213 as CAD recovery, GBP fall weighs
- CAD steadier with oil & risk assets as GBP stifled by UK data

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• Spot: 1.7280
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The Pound-to-Canadian Dollar rate was slipping back toward an important level of technical support ahead of the weekend and potentially facing a period of consolidation as the Loonie continued to stabilise and Sterling was dampened by uninspiring UK economic data.

Canada’s Dollar was one of the better performing major currencies ahead of the weekend as it continued to stabilise alongside oil prices and stock markets while potentially benefiting from the docile state of the U.S. Dollar.

Meanwhile, Pound Sterling was lower against all major counterparts with the exception of an underperforming safe-haven Japanese Yen after UK retail sales figures and IHS Markit PMI numbers for June and July left the market with little reason to cheer the British currency.

“The fall in the composite PMI isn’t as worrying as it seems since the largest gains following the easing of restrictions have already been realised. But comments in the press release citing drags on growth from self-isolations means that the resurgence of the virus is becoming a growing downside risk to our forecast for GDP to return to its February 2020 level in October,” says Kieran Tomkins, an assistant economist at Capital Economics.

The net effect of Friday’s price moves saw the Pound-to-Canadian Dollar rate slipping from 1.73 and back toward the 1.7213 area where it had previously found support on Wednesday and Thursday, as a volatile trading week draws to a close.

Above: Pound-to-Canadian Dollar rate shown at 4-hour intervals with Fibonacci retracements of May recovery, 55 (blue), 100 (green) & 200-period (black) moving-averages.

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“GBPCAD quickly rallied to the 1.75 area (and a little more) after breaking above noted ceiling resistance at 1.7260. But price action has turned choppy,” says Juan Manuel Herrera, a strategist at Scotiabank in a Tuesday note.

“There is still decent underlying bull momentum in the GBP, however, according to the intraday, daily and weekly oscillators which may limit losses. Look for 1.7250/60 to hold GBPCAD weakness for now,” Herrera adds.

Friday’s lower-than-expected IHS Markit surveys for July warned that UK economic momentum could slow further in the months ahead due partly to large numbers of workers having been required to isolate by the government’s testing and tracing programme, a situation which itself results from the rampant spread of newly mutated editions of the coronavirus within one of the world’s most vaccinated populations.

Retail sales data did surprise on the upside for June but was unable to dissuade the notion that the UK’s recovery may now be diverting onto a slower and possibly more pitfall-laden path, just as the Canadian Dollar looks to be finding its feet following heavy losses earlier this week.

“Our rotating financial factor model, which uses commodity prices and interest rate differentials along with USD indices and other risk appetite factors, still suggests that USDCAD should be in the low 1.24s based on correlated financial prices. We suspect that is the direction it is most likely to drift if the USD index stabilizes around current levels,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

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The Canadian Dollar had suffered heavy losses alongside oil prices and stock markets on Monday, leading to declines for the Loonie which lifted USD/CAD to its highest level since February while briefly elevating the Pound-to-Canadian Dollar above 1.75 for the first time since April.

But oil benchmarks have since stabilised with investors also renewing a bid for stocks and other risk assets, enabling the Canadian Dollar to find its foot just as appetite for Sterling has been dampened by soggy UK economic data and recent commentary from Bank of England, which suggests only limited, if-any appetite at the BoE for a ‘tightening’ of its monetary policy any time soon.

This combination leaves the short-term outlook for the Pound-to-Canadian Dollar rate hinged substantially on the trajectory of USD/CAD, which it often tends to follow and always partly reflects, given that GBP/CAD is effectively an amalgamation of USD/CAD and GBP/USD.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with Fibonacci retracements of May recovery, 55 (blue), 100 (green) & 200-day (black) moving-averages as well as USD/CAD (orange).