Pound-Canadian Dollar Week Ahead Forecast: Struggling Above 1.74 and Risking Slippage to 1.7260

- GBP/CAD could test but struggle above 1.74
- Would risk fall to 1.7260 if USD/CAD falters
- Or if CAD attempts a comeback on CA data
- CA GDP data eyed ahead of U.S. payrolls

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• GBP/CAD reference rates at publication:
• Spot: 1.7347
• Bank transfer rates (indicative guide): 1.6740-1.6860
• Money transfer specialist rates (indicative): 1.7190-1.7260
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound-to-Canadian Dollar rate stabilised early in a holiday-shortened week but may struggle to sustain itself above the nearby 1.74 level over the coming days and would risk slipping back below 1.73 if either the U.S. Dollar or Canadian economic data spurs the Loonie on to a recovery.

Pound Sterling buckled under pressure from the Canadian Dollar last Friday, leading GBP/CAD to slide as far as 1.7282 ahead of the weekend before recovering smartly at the opening of what is a holiday-shortened week for the UK and the global foreign exchange hub that is London.

The Pound-to-Canadian Dollar rate had 1.74 in its sights early in what is also a quiet week for UK economic data and may even attempt to get above the level if the Loonie’s month-long underperformance endures, although there’s also a risk that Sterling is eventually forced to retreat toward 1.7260.

Canada’s Dollar has been a laggard in an already-underperforming commodity currency pack in August, a month when Sterling proved more resilient to a strengthening U.S. Dollar than the Loonie, which was also hampered by falling commodity prices, though it’s possible uncertainty relating to Canada’s September 20 election could now encourage that underperformance if it hasn’t done so already, which would be supportive of GBP/CAD.

“While we usually stress that Canadian Federal elections are not a major source of volatility for the CAD, investors may start to pay a little more attention to the campaign as polling suggests a steady erosion of support for the Liberals since the election gun was fired,” warns Shaun Osborne, chief FX strategist at Scotiabank.

“We expect the USDCAD to remain well-supported on minor dips ahead of next week's data run as markets anticipate another solid increase in payrolls. We think the upper end (1.2790) of our estimated week-ahead range is more reachable than the lower zone (1.2479)

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 55 and 200-day moving-averages and USD/CAD.

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The Pound-to-Canadian Dollar rate always closely reflects the relative performance of USD/CAD and the main Sterling exchange rate GBP/USD, and would remain supported above 1.7350 this week if Scotiabank’s Osborne is right about USD/CAD facing upside risks.

“Below the market we have strong support offered by the 1.3571 July low and the 55-week ma at 1.3607,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to GBP/USD.

“We are starting to favour recovery BUT rallies face tough overhead resistance and above the 200-day ma lies the 55-day ma at 1.3830, the downtrend at 1.3855 and the more important 1.3984/1.4018 medium term pivot,” Jones writes in a Monday note.

A USD/CAD rally to the 1.2790 range ceiling marked out by Scotiabank would support GBP/CAD above 1.7350 even if along the way GBP/USD fell back toward the 2021 low of 1.3571 flagged by Commerzbank’s Jones, while the Pound-to-Canadian Dollar rate would rise this week if the main Sterling pair proves more resilient, which would in the event that the Loonie’s election vulnerability sees its underperformance continue over the coming days.

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While recent trading has been favourable to the Pound-to-Canadian Dollar rate there’s also risk that Sterling is forced to retreat as far as 1.7260 if USD/CAD comes under pressure in the days ahead, which could happen if either Canada’s economic data gets the market looking anew at Bank of Canada (BoC) interest rate prospects, or if a further unravelling of the U.S. Dollar is replicated in USD/CAD.

“As our bond colleagues outline, with the front-end of the US Treasury curve anchored, the scene could be set for some bearish yield curve steepening. As we saw late last year, such an environment typically sees the dollar lower versus the high beta currencies,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“Indeed, a further recovery could come through for currencies backed by more hawkish central banks, NZD, NOK & CAD in the G10 space and BRL, RUB and perhaps MXN in the EM space,” Turner writes in a Friday note.

Generally GBP/CAD is often seen falling alongside USD/CAD, and would decline to 1.7260 if the latter falls to the bottom of the range anticipated by Scotiabank this week even if in the meantime GBP/USD tests the initial resistance levels at 1.38 and 1.3830 flagged by Commerzbank’s Jones, though much depends here if the U.S. Dollar declines induced by Federal Reserve Chairman Jerome Powell last Friday are renewed over the coming days.

Above: GBP/USD at daily intervals, with major moving-averages overhead. Shown alongside USD/CAD and CAD/USD.

“After Jackson Hole, FX markets have another excuse to sit on their hands over the coming week ahead of the Labour Day long weekend in the form of the August NFP data (consensus +750k), which is the highlight of the coming week’s calendar,” says Scotiabank’s Osborne.

Chairman Powell confirmed it’s now likely the Fed will begin to wind down its quantitative easing programme before year-end, but ruffled the market and U.S. Dollar’s feathers when noting the U.S. economy will have to pass “a different and substantially more stringent test” involving the reemployment of some six million idled American workers before the bank eventually lifts its interest rates.

This means the U.S. Dollar could potentially be vulnerable to any poorer-than-expected non-farm payrolls report on Friday, although before then there’ll also be scope for Canadian economic data to weigh on both USD/CAD and GBP/CAD.

“In Canada, the trade balance is likely to narrow from an elevated prior month, but the attention will be on monthly and quarterly GDP reports,” says Avery Shenfeld, chief economist at CIBC Capital Markets.

Tuesday’s GDP data is likely to reveal that Canada’s economy grew by 0.7% during June in what would be a strong finish to a slower quarter if Statistics Canada’s advanced estimate from the May report is on the money, but the market may be most interested in the advanced estimate for July.

“Our economists are forecasting a 2.5% annualized rise in Q2 GDP on Tuesday, matching the July MPR projection from the BoC. The quarter was mostly characterized by lockdowns to combat a strong third COVID wave,” says Elsa Lignos, global head of FX strategy at RBC Capital Markets. “A new nowcast for July GDP is expected in the +0.5-0.7% range as services output should more than offset softer early indicators for monthly (goods) sales.”

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with 55, 100 and 200-week moving-averages as well as USD/CAD.