The Pound-Canadian Dollar Rate Week Ahead: Charts Warn of Losses but U.S.-Iran Tensions a Wild Card

Image © Adobe Stock

- GBP/CAD slips lower in early New Year trade.

- But GBP and CAD seen on back foot this week.

- Leaving GBP/CAD rate outlook on neutral ground. 

- Brexit bill set to pass UK parliament this week. 

- As CAD eyes Poloz speech and Dec jobs data.

The Pound-to-Canadian-Dollar rate declined in the opening week of the New Year as the Loonie advanced against all major rivals other than the Japanese Yen, although the outlook for the week ahead sees the exchange rate starting off in neutral ground even though the charts are arguing for further losses. 

Canada's Dollar broke kept Pound Sterling under pressure throughout last week and broke above the key 1.30 resistance level against its U.S. rival as investors celebrated the President Donald Trump's claim that his 'phase one deal' to end the trade war with China will be signed on January 15. Although the Loonie remained resilient even after Trump claimed responsibility for a missile strike that killed Iranian General Qassem Soleimani. 

"The risk of Iranian retaliatory attacks on Saudi Arabian soil as well as the risk of a complete collapse of social order in Iraq likely means that Oil will have to trade with a risk premium for the time being. That is probably the most important market take away for now – World War III is not around the corner," says Andreas Steno Larsen, a strategist at Nordea Markets. 

The missile strike has stoked fears of a possible U.S. conflict with Iran in the Gulf, leading stock markets to fall and the U.S. Dollar as well as oil prices to rise. However, what matters most to the outlook for the Pound-to-Canadian-Dollar rate is how the Canadian and U.S. Dollars respond Trump's Saturday claim to have preselected 52 sites inside Iran for attack in even the country or its so-called proxy forces retaliate against U.S. bases and personnel elsewhere. 

Above: Pound-to-Canadian-Dollar rate shown at 4-hour intervals.

"We do think that scope for GBP gains is limited (1.72) from here. We look for corrective losses to reach the 1.66/1.68 regional potentially in the next few weeks. The 40-week (200-day) MA may dictate whether losses hold around 1.68 (50% Fib retracement at 1.6837) or extend to the 61.8% Fib support at 1.6611. Look to fade near-term GBP gains," says Juan Manuel Herrera, a strategist at Scotiabank in note to clients ahead of the holiday. 

Herrera said ahead of the holiday that Sterling's gains should be limited to 1.72 and that over the coming weeks, the Pound should decline toward 1.68. Sterling did advance into the New Year but gains were stymied just above that 1.72 level and have since given way to fresh losses. 

Shaun Osborne, chief FX strategist at Scotiabank, said last week the GBP/USD rate will vulnerable to further weakness in the days ahead although he also warned of a possible move higher in the USD/CAD rate over the short-term, which could be said to leave the outlook for the Pound-to-Canadian-Dollar rate on neutral ground. After all the GBP/CAD rate can be calculated at its most basic level by dividing the GBP/USD rate over the CAD/USD rate. 

"We think that cable will trade defensively and will struggle to remain above 1.31—and possibly 1.30—as no-trade-deal risks linger ahead of the of trade negotiations with the EU which (officially) begin in Feb," Osborne says, before turning to the USD/CAD rate. "Price action is leaning a little more USD-positive perhaps after the late year USD decline stalled around 1.2950/60. Consecutive “doji” candle signals on the daily chart suggest the move lower is blocked, at least momentarily, and the USD risks backtracking modestly."

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

 AA

Pound Sterling: What to Watch

Pound Sterling softened against both the Euro and Dollar heading into the weekend as investors responded to an admission by President Donald Trump that U.S. forces were responsible for the killing of a senior Iranian military commander in Iraq, stoking tensions between the two rivals that are likely to again set the agenda in currency markets early in the new week.

Tensions were already rising between the U.S. and Iran after the White House said the U.S. was responsible for an earlier missile attack on an Iran-backed militant group in Iraq, although the death of targeting of General Qassem Soleimani earlier in the week has exacerbated the fued. And President Trump may now have upped the stakes again when saying via his Twitter feed late Saturday the U.S. has preselected 52 sites inside Iran for attack in the event that any of its bases or personnel in Iraq or elsewhere are targeted by Iran-enabled forces.

Investors are unlikely to welcome the hawkish White House rhetoric, which could see risk assets remain on the back foot Monday and safe-havens continue to outperform. That would benefit the Dollar against all currencies other than the Japanese Yen and Swiss Franc but it also provide support to the Euro in the short-term if it forces more international investors out of emerging markets. In that environment the now-slow-moving domestic story could easily fall by the wayside for Sterling.

Monday sees the IHS Markit final services PMI for December released at 09:30 and consensus is for the earlier ‘flash’ estimate of 49.0 to be revised higher to 49.1, although risk might be to the downside given that both the construction and manufacturing surveys have already surprised on the downside despite markets also looking for upward revisions there too.

"Figures covering the pre-election period are affected by high political uncertainty, so the poor PMIs for December shouldn’t cause too much concern," says Andrew Wishart at Capital Economics. "The first “clean” data for the post-election period. It is in these we need to see some improvement in order to confirm a “Boris bounce”. If that doesn’t happen, expect interest rates to be cut in the following months."

Tuesday sees the Withdrawal Agreement Bill back before parliament for the ‘committee stage’ before the whole of House, which could take until the end of Wednesday, while Lords amendments and the Third Reading of the bill are expected to take place Thursday. The bill is the legislative vehicle through which the withdrawal agreement is brought into force.

Prime Minister Boris Johnson’s withdrawal bill is widely expected to become law given the scale of the Conservative majority so the event itself is seen by analysts as unlikely to move the Pound, which will leave Sterling to take its cues from developments in the international arena and on the charts.

That being said, Johnson will meet European Commission chief Ursula Von der Leyen in Downing Street on Wednesday as markets wait to hear if a possible February visit to the U.S. and meeting with President Donald Trump will be confirmed. Senior Tories have been calling for the government to waste no time in starting parallel trade negotiations with the U.S. and Foreign Secretary Dominic Raab is set to meet Secretary of State Mike Pompeo in London Thursday, although that meeting may now be overshadowed by the State Department’s ire over the UK’s response to recent events in Iraq, which has echoed that of France and Germany.

"Three and a half years after the EU membership referendum, the UK will finally leave the EU in 4 weeks’ time," says Jane Foely, head of FX strategy at Rabobank. "The tone and the pace of the talks between the UK and the EU will be instrumental for guiding GBP in the months ahead and we see ample scope for GBP/USD to dip back to the 1.28 area as politicians on both sides lay out their positions. If an appropriate deal is successfully negotiated it is possible that GBP/USD could trade in a 1.35-1.40 range in 2021. That said, there is a lot of ground to be covered before this becomes a realistic prospect."

AA

The Canadian Dollar: What to Watch 

The Canadian Dollar saw a strong start to the New Year in which it advanced against all major rivals other than the Yen, although appetite for the Loonie will be tested in the week ahead. 

Developments in the international arena, notably in tensions between the U.S. and Iran, as well as the Bank of Canada's interpretation of recent economic events will be key to the Canadian Dollar's trajectory in the days ahead.

Canada's Dollar is sensitive to the price of oil, the country's largest export, and so was able to hold earlier gains against the U.S. Dollar last week despite the greenback stabilising in response to the U.S. admission that it killed Iran's Qassem Soleimani. WTI crude oil futures prices rose 3.1% on Friday while Brent crude futures rose 3.7% in response to fears over a possible U.S.-Iran clash in the Gulf, which boosted the U.S. greenback and other safe-haven currencies.

"Oil prices will rise further next year and that the BoC and the NB will continue to keep rates on hold even as the ECB and several other central banks ease policy," says Jonas Goltermann at Capital Economics. "This suggests to us that the loonie and the krone will outperform...While we expect the US dollar to strengthen broadly as the Fed remains on hold, we forecast that the Canadian dollar will appreciate by 4% against the greenback."

Canada's oil industry and bond yields that still pay investors more than those of the U.S. government helped prevent the USD/CAD rate from rising too far off its recent low around 1.2950. The Loonie had fallen to lowest since late 2018 last week amid earlier broad weakness in the Dollar that was prompted in part by President Donald Trump's declaration that his phase one deal with China will be signed on January 15. 

However, analysts at Scotiabank say the Canadian Dollar's correlation with oil prices isn't what it used to be and that the U.S. Dollar could be due a further comeback. Meanwhile, other local analysts are looking to the economic calendar for clues for on the likely trajectory of the Loonie in the week ahead. 

"There could be scope for disappointment. History has taught us that large moves (either up or down) aren’t always offset the following month. Moreover, even after the shock decline November, the year-over-year gain in employment was still a little higher than would normally be expected given the muted pace of GDP growth," says Andrew Grantham at CIBC Capital Markets.

Thursday will see Bank of Canada Governor Stephen Poloz address the Greater Vancouver Board of Trade's Economic Outlook Forum in which he's expected to provide insight into the bank's reading of the November jobs report, which showed employment contracting sharply in Canada and the unemployment rate rising 40 basis points in a straight line to 5.9%. The speech is due at 19:00 London time on Thursday.

Poloz's speech will come barely more than 18 hours before Statistics Canada will publish jobs figures for December, which markets will scrunise closely for signs of a more protracted turn for the worse in the labour market. Consensus is looking for the economy to have added 31.8k new jobs in December and for the unemployment rate to have declined from 5.9% to 5.8%. The data is due out at 13:30 on Friday. 

The BoC left its cash rate unchanged at 1.75% all year in 2019, supporting bond yields and lofting the Loonie, but it's said households, the consumer and international tensions will be key to its policy decisions in the months. 

"The belief in low volatility has become fairly engrained in market psyche," says Greg Anderson, head of FX strategy at BMO Capital Markets. "Fear of a breakout is minimal. Speculative activity is low. These factors probably enhanced USDCAD's reaction to the generalized USD dip between Christmas and New Year's Day, but they may well reinforce a return to the 1.30 to 1.35 range in January."

Time to move your money? The Global Reach Best Exchange Rate Guarantee offers you competitive rates and maximises your currency transfer. Global Reach can offer great rates, tailored transfers, and market insight to help you choose the best times for you to trade. Speaking to a currency specialist helps you to capitalise on positive market shifts and make the most of your money. Find out more here.

* Advertisement