Pound-Canadian Dollar Week Ahead Forecast: Supported Near 1.7450 but Tiring Above 1.7550

- GBP/CAD trading 1.7450-to-1.7550 range
- Supported by USD strength, softening CAD
- Post-election CAD recovery a risk for GBP
- Fed decision may lift GBP/CAD thereafter

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• GBP/CAD reference rates at publication:
• Spot: 1.7545
• Bank transfer rates (indicative guide): 1.6930-1.7054
• Money transfer specialist rates (indicative): 1.7387-1.7450
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound-to-Canadian Dollar exchange rate has established itself in a narrow 1.7450-to-1.7550 trading range but could stress both of those confines over the coming days as the Loonie digests local election results.

Pound Sterling will meanwhile navigate a Bank of England policy decision and all currencies contend with the next steps in Federal Reserve monetary policy.

Sterling entered the new week aloft above 1.75 against the Canadian Dollar and could remain buoyant close to this level if strategists at Scotiabank are on the money in their outlook for USD/CAD and GBP/USD, which are tipped to trade with a bias toward 1.29 and 1.36 respectively.

The Pound-to-Canadian Dollar (GBP/CAD) rate closely reflects the relative performance of the aforementioned two and would rise as far 1.7546 this week under the above scenarios.

But Sterling would face downside risks and could potentially dip below 1.74 in the event that Monday’s Canadian election leads USD/CAD to fall toward the bottom of the anticipated range.

“It is hard seeing spreads widen significantly further in the CAD’s favour at this point, while commodity prices may struggle if the risk environment deteriorates or if next week’s FOMC meeting supports the idea that the Fed is getting closer to tapering,” says Shaun Osborne, chief FX strategist at Scotiabank.

"Our forward-looking range estimate for the week ahead suggests USD upside risk towards 1.29 while downside potential is limited to the mid-1.25s," he adds.

Canadians hit the ballot box on Monday to vote in a snap election that pollsters suggest is too close to call for either of the main parties, with possible implications for a Canadian Dollar that had been a subtle underperformer among major currencies since the vote was announced in mid-August.

Above: Pound-to-Canadian Dollar rate shown at 4-hour intervals.

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The ballot is the main event in the Canadian calendar this week and while many analysts doubt that it will have a large or long-lived impact on the Loonie whichever way the electorate cuts.

Some have observed a creeping cost to the Canadian Dollar in the form of a 'risk premium' that appears to have been priced-into to the Loonie since the vote was announced.

“According to our short-term fair value model (which includes rate differentials, relative equity performance, risk sentiment and commodity factors as variables) USD/CAD is currently 2% overvalued,” says Francesco Pesole, a strategist at ING.

"Barring the scenario of a hung parliament, political uncertainty in Canada should ultimately dissipate, helping CAD realign with its short-term fair value," says Pesole.

To the extent that this discount is election related then the vote itself could pose a risk to GBP/CAD in the event that the outcome leads the discount or risk premium to be priced-out of USD/CAD.

Although this might require one party or another to win a working majority in the parliament and there are few pundits or pollsters seriously entertaining that idea.

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“The FOMC will publish its economic outlook, one likely dented a bit in the near term, but full of confidence about both dampened supply-shock pressures on prices, and an improving jobs market, as we move through 2022. It might even bring forward some of the rate hikes that lie further out in the future,” says Avery Shenfeld, chief U.S. economist at CIBC Capital Markets.

As certainty emerges around the outcome of the election, the Canadian Dollar’s attention could shift quickly to Wednesday’s Federal Reserve (Fed) decision and the accompanying economic forecasts, and this is an upside risk to USD/CAD that could prove supportive of GBP/CAD given their positive correlations.

The Fed is widely expected to update the market on discussions about ending its $120BN per month quantitative easing programme but many economists including those at CIBC, ING and Scotiabank also suggest that its new forecasts may be likely to point toward a faster pace of U.S. interest rate rises in 2023 than was suggested back in June.

This is something that could act as a steroid for the Dollar and lift USD/CAD.

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

"Any shift in the median DOTs to imply a sooner and/or faster rate hike outlook will result in dollar strength given the importance of short-term yield spreads. An unchanged guidance from June given the inflation picture since then would be met with relief and some renewed USD selling," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

Beyond Wednesday Sterling’s attention will shift to IHS Markit PMI surveys of the services and manufacturing sectors out on Thursday just hours before the latest monetary policy decision from the Bank of England at 12:00 London time, while the Loonie will shift its focus to Thursday’s retail sales figures.

“We expect the monthly Canadian retail (merchandise) sales report to show lower sales over July and August,” says Nathan Janzen, a senior economist at RBC Capital Markets.

"We expect Canadian retail sales to have declined 0.5% in July—a smaller decrease than Statistics Canada’s preliminary estimate for a 1.7% drop. Our tracking of card spending points to another decline of about 1.5% in August," he adds.

Any suggestion by Statistics Canada on this week that sales contracted again in August would risk bolstering market perceptions of a Canadian economy that likely underwhelmed expectations in the third quarter, although this wouldn’t necessarily do much for GBP/CAD given that last Friday’s data showed UK retail sales falling for a second consecutive month in August too.

“Market participants will be closely scrutinising the updated policy communication from next week’s MPC meeting for any signal that the BoE is moving closer to raising rates. However, we believe that there is greater risk of disappointment which could trigger a temporary correction lower for the GBP,” says MUFG’s Halpenny, citing recent UK economic data.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with major moving-averages.