Canadian Dollar's Surge Against the Pound Must Now Take a Breather

Image © Bank of Canada

The Pound to Canadian Dollar exchange rate's recent fall has been breathtaking in scale with the pair recording a run of 12 consecutive days of decline, but a breather should now be expected according to a new analysis.

According to Shaun Osborne, FX Strategist at Scotiabank, GBPCAD losses are extending - as expected - rapidly below the double-top bear pattern trigger at 1.6860.

Osborne says the formation targets a fairly quick extension lower to 1.6375 (measured move target), but "there are a couple of concerns worth highlighting":

Image courtesy of Scotiabank.

GBPCAD fell from highs located near 1.73 - reached in both July and August - back to 1.6440, where we currently find it.

The decline comes amidst a rapid repricing lower of Bank of England interest rate expectations following a below-consensus inflation print and the Bank's September 21 decision to halt its interest rate hiking cycle:

Markets have promptly moved to raise bets for rate cuts starting in 2024, leading to a rapid deflation in the Pound.

The Canadian Dollar has meanwhile been bid in sympathy with a rising U.S. Dollar; a positive correlation that owes itself to the close ties between the U.S. and Canadian economies.

"The linkages between the US and Canadian economies are still incredibly tight (i.e. trade flows are vital, price developments and monetary policies overlap, and US & Canadian financial markets are highly integrated — partly as a result of cross border capital flows," explains Stephen Gallo, FX Strategist at BMO Capital Markets.

But can the fall in Pound-Canadian Dollar extend from here?

"There are a couple of concerns worth highlighting, however. Firstly, the elevated daily DMI signal suggests the GBP decline is overextended in the short run at least," notes Osborne.

Pound Sterling Live wrote in this week's 5-day GBPCAD forecast that the exchange rate was looking exceedingly oversold and a retracement of recent losses, or at least a decent pause in selling, was required.

Osborne says the sell-off is "very stretched, if only from a short-term point of view."

But the strategist reckons short-term GBP rebounds may be limited to the mid/upper 1.65s as a tentative estimate at this point while major resistance sits at 1.6850/60.

"A clear push back through the upper 1.68s is needed to steady the pound at this point more broadly," she says.