Pound-Canadian Dollar Week Ahead: Capped by 1.72 As New Lower Range Prevails

- GBP/CAD seeks out top of new, lower range
- As BoE, UK political risk fades & CAD stalls
- Job miss, USD & BOC risk in focus for CAD
- GBP struggles at 1.72 without CAD setback

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The Pound-to-Canadian Dollar rate entered the new week on its front foot but is now trading under the auspices of a new and lower range that could ultimately see Sterling capped by the 1.72 level in the absence of a setback for Canada’s Loonie.

Sterling was higher across the board at the opening of the new week as it drew a line under steep earlier declines, with price action coming after regional as well as Scottish elections passed without major event at the weekend, but also amid a softening of the Canadian Dollar.

Canada’s Loonie had outperformed last week until April employment data surprised on the downside of economist expectations, helping in the process to make GBP/CAD one of the better performing Sterling pairs since then.

Canada’s economy had been expected to hand back only around 160.5k jobs in April, out of the 303.1k new positions previously created in March, although the actual figures saw employment decline -207.1k with the jobless rate rising from 7.5% to 8.1%.

USD/CAD has since slowed in its descent which, when combined with Sterling’s own tentative rebound, has given the Pound-to-Canadian Dollar rate a lift although without a further and more protracted setback for the Loonie the British currency is increasingly being condemned to a new and lower trading range.

“Some short-term (at least) consolidation in the USD may be in order before the market takes a run at the 2017 low at 1.2065. We spot short term resistance at 1.2230/50 and feel that the USD will need to trade well through the 50 level in order to rebound more strongly,” says Shaun Osborne, chief FX strategist at Scotiabank.

Above: Pound-to-Canadian Dollar rate shown at hourly intervals with USD/CAD.

Osborne and the Scotiabank team say that U.S. Dollar rallies should ultimately “attract renewed selling” which, in light of the recent positive correlation between USD/CAD and GBP/CAD, would act as something like a sell-by date for the Pound-to-Canadian Dollar rate.

The Pound-to-Canadian Dollar rate may have only limited scope for recovery unless investors were to be further discouraged away from the Loonie so as to give any USD/CAD recovery the legs to continue, and if the latter is likely to happen at all it wouldn’t be much before this Thursday at 16:00.

Bank of Canada (BoC) Governor Tiff Macklem will speak about an unknown topic at an online event for Atlantic Canada universities this Thursday and Canadian Dollar exchange rates would likely be sensitive to any monetary policy themed remarks.

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“We may not hear much change in the rhetoric this close to the latest BoC meeting. CAD may remain supported on the back of global risk-supportive mood,” says Francesco Pesole, a strategist at ING.

Many analysts doubt the address will be relevant coming so soon after the April policy decision, although the event is another opportunity for the Governor to correct any misperceptions about the outlook for BoC policy.

This is after the Bank announced a second reduction to the pace at which it buys Canadian government bonds each week last month and indicated through its forecasts that the economic conditions necessary for an eventual increase in the 0.25% cash rate could be in place as soon as next summer.

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

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“We continue to like fading USD/CAD rallies,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

Financial markets and the Canadian Dollar to firm up wagers that this is when the BoC would be most likely to begin normalising its policy, reinforcing a strong and increasingly entrenched downtrend in USD/CAD that is an outright headwind for the Pound-to-Canadian Dollar rate.

The Pound-to-Canadian Dollar rate has already found support just beneath the 1.69 handle although its recovery would lose momentum between 1.71 and 1.72 this week if USD/CAD holds below 1.2150 and, as some analysts anticipate, GBP/USD is unable to get past the 1.41 level that was nearby on Monday.

“The MPC went out of its way to convince the market it was not delivering a hawkish policy shift,” says Paul Robson, head of G10 FX strategy EMEA at Natwest Markets, who sees the main Sterling exchange rate GBP/USD holding around Monday’s 1.41 level through the current quarter.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with USD/CAD.

Sterling’s prospects have dimmed since last week when the Bank of England (BoE) announced sweeping upgrades to its growth forecasts but otherwise declined to provide Sterling with fuel for any further advance against major peers.

BoE policymakers lifted forecasts for GDP growth and inflation, which now impy above-target price pressures over the coming year before the consumer price index is seen returning to the target by the end of the forecast horizon, suggesting limited if-any room for further gains by Sterling over the short-term.

That in turn enhances the importance of Wednesday’s first-quarter GDP data for the Pound as well as all other economic figures emerging from the UK over the coming months as these would likely need to surprise on the upside of the BoE’s expectations before the bank becomes comfortable with any further gains by Sterling.

Consensus looks for Office for National Statistics figures to show the UK economy contracting by -1.6% under a New Year and first quarter ‘lockdown’ when the data is released at 07:00 London time on Wednesday in what is the highlight of the week for the Pound.

However, it could be relevant for Sterling that the BoE was slightly less downbeat than the market when anticipating only a -1.5% decline for the period, which sets an even higher bar for GBP/CAD to derive any support from the data.