GBP/CAD Rate Testing Key Supports as Outlook Hangs in Balance
- Written by: James Skinner
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- GBP/CAD recovery trend at make or break levels on charts
- Outlook hangs in balance as U.S. CPI & UK GDP data loom
- GBP/CAD needs to hold over 1.5170 to avoid reversal lower
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The Pound to Canadian Dollar rate has made a poor start to the November month and is barely more than one bad day away from reversing its recovery off the all-time lows reached in late September, meaning the market response to U.S. inflation and UK GDP data will be important influences on the outlook.
Sterling remained the worst performing major currency of November on Thursday after its October recovery stalled around the turn of the month before giving way to a sizable corrective setback in the wake of last Thursday's Bank of England (BoE) interest rate decision.
The BoE's latest vacillation about interest rates included a suggestion that borrowing costs may yet be lifted further but also a warning that Bank Rate is unlikely to rise as far as parts of the markets would appear to have wagered and was followed by widespread selling of Sterling.
This has pulled GBP/CAD back sharply from almost five month highs above 1.58 and pushed it into a cluster of technical support levels sitting between 1.5170 and 1.5418 on Thursday while leaving a lot about the outlook for Sterling to be determined by economic data emerging ahead of the weekend.
"Broadly, we think the late Sep low in the cross represents a major turning point; bullish price signals developed around the GBP’s sharp rebound from the 1.41 level (bullish weekly key reversal and monthly bull hammer)," says Shaun Osborne, chief FX strategist at Scotiabank.
Above: Pound to Canadian Dollar rate shown at 4-hour intervals with selected moving-averages and Fibonacci retracements of September recovery indicating possible areas of technical support for Sterling. Click image for closer inspection.
"Gains have faltered about where we expected (retracement resistance at 1.5740) but we continue to feel that GBP gains beyond here are likely and will drive the cross towards the 1.60/1.65 range. Support is (likely firm now) 1.5170," Osborne said following a Monday review of the Canadian Dollar charts.
GBP/CAD would need to hold above 1.5170 at the least through the end of the week in order to avoid giving the impression of a recovery trend having been brought to an abrupt end and the U.S. Dollar response to this Thursday's inflation data is likely to be key to whether this is possible.
"The one thing that is keeping the USD afloat right now is upside risk to Fed terminal rate and that’s a function of incoming data – especially this week’s CPI," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.
"The bias for now is to the topside as we do see risks of Fed/BoC divergence looming large again, but if that US CPI number disappoints, then we’ll have to reassess our view," Rai said in a recent reference to USD/CAD.
Markets are hoping to see inflation fall for the month of October but an increase cannot be ruled out and would all but assure that the Fed lifts its interest rate further than the 4.7% that was suggested in September's forecasts as the likely peak for the cycle, with possible implications for many currencies.
Above: GBP/CAD at 4-hour intervals alongside U.S. Dollar Index and USD/CAD. Shows an often negative correlation between Sterling and U.S. Dollar. Click image for closer inspection.
The big risk is that U.S. inflation rises further to vindicate the market for betting that the Fed's interest rate is likely to rise above 5% some time next year, which would potentially lift the U.S. Dollar and USD/CAD but could weigh further on a GBP/CAD that is often negatively-correlated with the other two.
"This report will provide clues for Fed policy, though this release alone won’t dictate whether the Fed delivers 50bps or 75bps in December, as today’s report is one of two ahead of the December FOMC meeting," says Daria Parkhomenko, a strategist at RBC Capital Markets.
"Given this and the market wanting to latch onto any positive news, the market may shrug off a small miss on the upside in core, though a large miss may see the market adjust the terminal rate higher," Parkhomenko said on Thursday.
Friday's UK GDP data will also be an important influence on how Sterling and GBP/CAD finish out the week but is expected to show the economy contracting by -0.5% for the third-quarter, leaving it on course for a recession that the BoE says is likely to last for as much as two years.
That data is set to be followed next week by October's inflation figures and a budget statement that is widely expected to confirm the newly recomposed UK government intends to pursue a budget surplus through steep spending cuts and tax increases that will also act as a further headwind for GDP.
Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving-averages and Fibonacci retracements of September recovery indicating possible areas of technical support for Sterling. Click image for closer inspection.
