- GBP/CAD breaks toward June lows ahead of BoE decision.
- GBP needs to recover 1.6935 support to avert more losses.
- BoE restraint might lift GBP/CAD but forecasts point lower.
- Scotiabank, BMO and HSBC all tip lower GBP/CAD ahead.
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The Pound-to-Canadian Dollar exchange rate was stumbling toward June lows in a make-or-break sesssion for the short-term outlook on Thursday just hours out from the latest Bank of England (BoE) policy decision.
Pound Sterling was quoted as low as 1.6907 against the Canadian Dollar in morning trade on Thursday after ceding an important support level at 1.6935 that technical analysts say is key to whether this week's fall continues.
The Pound-to-Canadian Dollar rate also fell below the 200-week moving average at 1.6984 on Thursday, a level that had underpinned it on a closing basis for three consecutive weeks, and now needs to recover both 1.6935 and 1.6984 to avert further losses.
This is after the 200-day moving-average at1.7088 gave way earlier in the week. Failure to reclaim those levels would risk seeing the British currency slide to the bottom of the 1.6845-to-1.7120 range flagged by Pound Sterling Live Sunday. Failure would also augur more losses in subsequent weeks and months.
"The rising channel off the late May low resembles a bearish flag, which could tilt risks for the GBP to the downside—contingent on a clear break under 1.6935 support—but we note that trend signals are flat and that longer term price action (a series of weekly doji candles that have carved out a bullish “tri star” signal) is more constructive," says Juan Manuel Herrera, a strategist at Scotiabank.
Herrera said Monday that Scotiabank is "leaning a little more constructively towards the GBP" and that an increase back to 1.7350 is possible, although this is contingent on Sterling recovering 1.6935 and establishing a foothold above 1.72. That puts the spotlight on BoE Governor Andrew Bailey this Thursday.
Above: Pound-to-Canadian Dollar rate shown at hourly intervals with 200-period moving average.
Thursday's price action came just hours out from the June BoE decision that's widely expected to produce a £100bn increase in its quantitative easing programme, with Bank Rate left unchanged at 0.10%.
The bank is seeking to ensure the smooth functioning of a government bond market that would be swamped by new coronavirus-related issuance if not for the BoE stepping in to soak it up on a supposedly temporary basis.
"The BoE will continue to act in a way that supports the fiscal policy response, and the government's policy response will ultimately drive the exchange rate," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "In the bigger picture, debating the size of GBP moves around this week's BoE rate decision is a bit like splitting hairs. That said, we suspect the headline risk is skewed towards an increase of more than £100 billion, if for no other reason than to give the MPC flexibility on the pace of asset purchases going forward. But the current Fed, trade and fiscal policy dynamics should probably yield demand for GBPUSD below 1.25 over the near-term."
There's uncertainty over exactly how far the Bank will go on Thursday given that it has already announced £200 bn of additional purchases since the coronavirus clsoed down the domestic economy, while the market consensus suggests the UK government borrowing requirement will be something like £270bn for 2020.
That leaves HM Treasury short of just £70bn and could mean there's scope for the BoE to undershoot market expectations on Thursday, which would be positive for Sterling and the Pound-to-Canadian Dollar rate.
Above: Pound-to-Canadian Dollar rate shown at daily intervals, breaking below 200-day moving average this week.
The range of analyst forecasts however, suggests public borrowing could rise as high as £330bn in 2020, which would imply a HM Treasury funding shortfall of £130bn and could necessitate a larger-than-consensus increase in the BoE bond portfolio Thursday. Growth in this bond portfolio matters for the exchange rate outlook because it has a direct bearing on the amount of Sterling that will trade on the market in the coming years, and a meaningful one too.
"Two drivers are starting to have a direct impact on currency markets: debt dynamics and balance sheet expansion. Fiscal room, debt dynamics and balance sheet expansion are all intertwined. Those with more fiscal room may see their economies recover faster than those with larger debt overhangs, without resorting to even larger balance sheets, thus allowing their currencies to outperform," says David Bloom, head of FX research at HSBC. "Our preferences in the medium term remain those currencies where fiscal firepower is less constrained: the AUD, NZD, NOK and SEK...we see downside risks for the EUR, GBP and CAD given their more challenging debt-to-GDP profiles."
Central bank quantitative easing represents an increase in supply of the domestic currency although increases to bond buying programmes have been so significant this year, as a result of the coronavirus, that they will inevitably have implications for the value of the currencies in question. But with differences in policy responses as large as the variations that exist between countries' debt-to-GDP levels, the exchange rate implications could be significant.
HSBC forecasts the Pound-to-Canadian Dollar rate will fall back to 1.67 this summer before recovering to 1.71 by the end of September and 1.74 before the curtain closes on 2020. Meanwhile, Scotiabank forecasts a return to 1.6891 in the weeks ahead, where Sterling is seen remaining near through the rest of the year, while BMO tips a decline from 1.71 in June to 1.65 by year-end.
Above: Pound-to-Canadian Dollar rate shown at weekly intervals with 200-day moving average.