GBP/CAD Rate Struggles for Momentum Near One Year High

"The market judges the UK financial system resilient to external shocks and BOE describes the UK banking system as resilient" - BofA Global Research.

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate appeared to lose momentum around one-year highs against a risk-averse global market backdrop ahead of the weekend but could be likely to remain above 1.67 in the days ahead.

Canada's Dollar was close to being an outperformer among major currencies on Friday as U.S. Dollar exchange rates rose amid fresh losses for stock markets, declines across the commodity complex and a rally in government bonds. 

"Canadian retail sales started the year with a bang, increasing 1.4% in January, double the pace expected by consensus and given in the advance estimate," says Karyne Charbonneau, an economist at CIBC Capital Markets. 

"It seems that there will be at least some payback in February however, as the advance estimate suggests retail sales fell 0.6%. While strong, this release is unlikely to play a major role in the Bank of Canada's decision next month," Charbonneau writes in a Friday note to clients.

There was no obvious response from the Loonie when Statistics Canada said on Friday that retail sales had risen by 1.4% in January and some 0.9% once sales of large-ticket items like cars are excluded from the data analysed.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals. Click image for closer inspection. 

In a similar manner to the Canadian Dollar, losses were limited for Sterling on Friday, leaving GBP/CAD little changed after an almost six-week rally appeared to stall around the Pound's best levels since March 2022.

The author's model indicates GBP/CAD is likely to trade in roughly a 1.6773 to 1.6869 range on Friday and following the Sunday open in Asia, in turn suggesting a continued struggle to overcome the current one-year highs, which coincide with a notable Fibonacci resistance level around 1.6847 on the charts. 

"The market judges the UK financial system resilient to external shocks and BOE describes the UK banking system as resilient," says Vadim Iaralov, a quantitative strategist at BofA Global Research, citing recent pricing of Sterling in the FX options market.

"For now, it appears the options market is trading the post-crisis relief rally and prices little tail risk of GBPUSD downside. By contrast, the Fed remains very uncertain over the tighter lending impact of US banks on the US economy," Iaralov and colleagues write in a Friday research briefing.

Sterling derived little obvious benefit when the Bank of England (BoE) raised Bank Rate from 4% to 4.25% on Thursday but financial markets have tended to look central bank statements and economic data in recent days.

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibbonacci retracements of September 2021 downtrend indicating possible areas of technical resistance for Sterling . Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

The BoE has most recently pegged the outlook for Bank Rate to outcome and implications of economic data emerging in the months ahead, which neither precludes nor promises any further increases for borrowing costs, although the market focus has been on the U.S. and European banking sectors. 

Banking shares led stock indices lower ahead of the weekend as investors, analysts and other commentators turned their attention toward a large German investment bank barely a week after speculation about the future of Credit Suisse led the Swiss government to force a merger with UBS. 

The tie-up between the two Swiss giants followed closures of several small banks in the U.S. after a series of management failures at Silicon Valley Bank contributed significantly to the fastest bank run in recorded history, which is now the subject of investigation by the Federal Reserve  (Fed).

"Silicon Valley Bank management failed badly. They grew the bank very quickly. They exposed the bank to significant liquidity risk and interest rate risk. Didn't hedge that risk," Fed Chairman Jerome Powell said on Wednesday. 

"We know that SVB experienced an unprecedented, rapid and massive bank run. So this is a very large group of connected depositors, a concentrated group of connected depositors in a very, very fast run. Faster than the historical record would suggest," he added in the Fed's monetary policy press conference.

Above: Pound to Canadian Dollar rate shown at weekly intervals with selected moving averages and Fibbonacci retracements of September 2021 downtrend indicating possible areas of technical resistance for Sterling . Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.