Canadian Dollar Could Push GBPCAD to 1.6375: Scotiabank

Image © Adobe Images

The Pound to Canadian Dollar exchange rate (GBPCAD) looks set for further declines according to a new analysis from Canadian bank Scotiabank, although short-term indicators suggest the pair might be reaching oversold conditions.

A technical study conducted by Scotiabank finds GBPCAD's "technical undertone has weakened decisively in the past week or so."

"Long-term trend support has yielded and weakness below the low set between the two tests of 1.7330 has triggered a clear double-top pattern which targets a fairly quick extension lower to 1.6375 (measured move target) over the next 1-3 months," says Scotiabank Chief FX Strategist Shaun Osborne.

The Pound has now fallen 3.75% - since highs at 1.7330 were reached first in July and then again in mid-August - to reach 1.6624.

The decline comes amidst a broader comeback by CAD which has tended to track movement in the U.S. Dollar, a correlation that exists owing to the interconnectedness of the Canadian and U.S. economies and financial systems.

The Dollar's ongoing rally therefore offers CAD support on 'the crosses' such as GBP/CAD.

However, the decline in GBPCAD might be reaching overextended levels says Osborne: "the only good thing — for the GBP — right now is that short term trends look potentially over-extended which may mean a minor relief rally for the cross in the days ahead."

Image courtesy of Scotiabank.

Weakness in GBPCAD also comes amidst a broader pullback in Pound Sterling which is now the worst performing of the major currencies when screaned over the past month.

The Pound had entered August as 2023's top-performing currency, thanks in large part to elevated investor expectations for the degree of further interest rate hikes to come from the Bank of England.

However, incoming data has prompted policymakers at the Bank of England to warn the peak in Bank Rate was now close at hand, a view that has contributed to the market reducing expectations for further hikes.

Indeed, Thursday's expected 25bp rise could be the final of the cycle.

From a technical perspective, any relief rally in GBPCAD could be expected to find resistance on a retest of the neckline breakdown point at 1.6860 (see chart).

"Fade GBP gains," says Osborne.

GBPCAD has meanwhile recently broken below its 200-day moving average; a momentum indicator that we at Pound Sterling Live use as a simple rule to consider trends on a multi-week basis.

As such, the 2023 rally in GBPCAD is now considered to have completed and the prospect of further losses in the exchange rate can be considered possible from here.