Pound to Tipped to Fall Back Further Against Canadian Dollar as 1.66 is Met

Sterling has been recovering against the Canadian Dollar from January 15 onwards in a convincing move that saw five uninterrupted days of gains.

The rally has however been questioned at 1.66 where we know the exchange rate often tends to pause; and resolution of this area will be important.

The pair has formed a bearish reversal candlestick pattern called a “Tweezer Top” on the daily chart (circled).

This happens when the exchange rate hits the same high level two days running, and suggests some short-term downside for the pair.

The pair has also met the 50-day moving average, which is likely to provide resistance against more upside.

We see a high chance of a pull-back down to support in the 1.6370s.

Beyond that, however, the short-term uptrend may continue, but we would ideally see a clearance of levels above, including the upper border of a down sloping channel line.

Confirmation of more upside, therefore, would come from a break above 1.6750, with a target at 1.6880.

For the Pound, a 'Rocky Road' Lies Ahead

For the Pound, the ruling by the Supreme Court that Brexit had to be approved by Parliament led to a rise but then a fall in Sterling as it the decision was largely irrelevant after Theresa May’s promise to involve Parliament anyway.

Whether the Scottish and Northern Ireland regional assemblies would get a vote on Brexit, was a key issue for Sterling, however, and the law lords, in the end, decided they should not.

This may explain why the Pound fell after the ruling as regional assemblies would not have agreed to Brexit.

Nevertheless, there is still scepticism as to how easy it will be for Theresa May and her government to get Brexit passed the House of Commons and Lords.

The Scottish National Party has already made it clear they will fight against Brexit as have the Liberal Democrats.

According to David Lamb, Head of FEXCO Corporate Payments, the government is likely to have a “Herculean Task” in getting Brexit voted through, with a “rocky road” ahead for its bill:

“Though the Supreme Court unanimously rejected the Scottish government’s attempt to be formally consulted on the triggering of article 50, the Scottish National Party has set itself on a collision course with the Westminster government over Brexit.

“With the Labour Party calling for amendments and the Lib Dems pledging to vote against article 50, it’s clear that the government faces a rocky road ahead.

“Piloting such a controversial piece of legislation through parliament was always going to be tricky – but in the face of such determined resistance from the opposition benches, it will be a Herculean task.

“As a result Sterling is enduring another week of yo-yoing fortune."

Canadian Dollar Faces Headwinds in 2017

Analysts at Bank of America Merrill Lynch have meanwhile written to clients warning that the Canadian Dollar could struggle through 2017.

Analysts note downside risks to CAD stemming from a divergence in interest rates between the United States and Canada, with the US Fed set on a path of greater tightening and the Bank of Canada (BOC) on one of more easing.

The contrast suggests upside for the Dollar and downside for CAD.

“The Federal Reserve is two hikes into policy normalization while Bank of Canada (BoC) Governor Poloz left open the possibility of a rate cut last week amid a still large output gap and a US-driven tightening of financial conditions. The increased correlation suggests the market believes the coming US fiscal stimulus will equally benefit Canada," say BofA.

Analysts would however expect some positive spillovers from Donald Trump's pro-growth fiscal policies which could provide CAD with some support.

However, other aspects of President Trump's policies, namely NAFTA renegotiation and a border adjustment (BA) tax suggest to BofA that underpriced macro risks that will continue to be a headwind for CAD over the course of 2017.

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