Pound-Canadian Dollar Techs Eye Support at 1.7440 as Trend Turns Tentatively Higher

- GBP/CAD retreats back toward 1.75 as CAD outperforms.
- Oil & risk rally lift CAD as analysts tip further gains ahead.
- GBP slows ahead of BoE as 1.7440 supports GBP/CAD. 

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• GBP/CAD spot rate at time of writing: 1.7522
• Bank transfer rate (indicative guide): 1.6895-1.7018
• FX specialist providers (indicative guide): 1.7245-1.7385
• More information on FX specialist rates here

The Pound-to-Canadian Dollar rate was in retreat on Tuesday as the Loonie outperformed and Sterling consolidated gains from last week's breakout rally, although analysts at Scotiabank say GBP/CAD benefits from nearby technical support and that USD/CAD is poised for more range-trading. 

In an unusual development, oil prices and the Canadian Dollar rose alongside the U.S. Dollar on Tuesday as investors celebrated what might be a tentative improvement in the prospects of a U.S. stimulus bill being agreed in the coming weeks, as well as favourable coronavirus developments in North America, Europe and elsewhere. 

This was enough to put the Pound-to-Canadian Dollar exchange rate on the defensive, taking it -0.34% lower and back toward the 1.75 handle, although it was still up 0.41% for the recent week and 0.76% for 2021. GBP/CAD overcame a number of technical resistance barriers last week to eventually trade close to 1.7650, before ebbing.

"The GBP has struggled to really make headway through the upper 1.70s over the past year and we think the reversal Friday really sets a short-term (at least) top on the cross again. We spot support at 1.7440/50 now and will reassess the GBP’s outlook (amid a broadly more positive backdrop, it has to be noted) from there," says Juan Manuel Herrera, a strategist at Scotiabank. "USDCAD is poised for more, choppy range trading." 

Last week's rally in GBP/CAD came alongside a rout in global risk markets including stocks and commodities, which weighed disproportionately on the oil and equity-linked Canadian Dollar at a point when Sterling was outperforming. Since then Sterling has slowed and risk assets have rebounded, enabling the Loonie to outperform. 

Above: Pound-to-Canadian Dollar rate shown at daily intervals with Fibonacci retracements of March 2020 fall. 

"CAD is the largest gainer in G10 overnight as oil prices rally around 2.5%. Indeed, the overnight gain in the CAD is more or less in line with where the six month regression with WTI daily change suggest it should," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "While equity futures are bid into another round of major tech earnings, we have yet to see material weakness in the USD, suggesting the correlation trade remains weak."

Canada's Dollar outperformed on Tuesday but may nonetheless have still been held back by an uncharacteristically resilient showing from the U.S. Dollar, which is undergoing "a re-balance in positioning" that's expected to resolve to the downside in the weeks ahead, according to CIBC. Meanwhile, Scotiabank says any losses for the Canadian Dollar should be limited at present by a directionless technical outlook for USD/CAD, which fell on Tuesday despite gains for almost all other major U.S. exchange rates, as well as signs of a likely strong performance from the economy in the final quarter. 

"This was a very good report; it lifted our Q4 GDP tracking to a little under 8%—versus the BoC’s 4.8% forecast—which would be about double the rate of (preliminary) growth in the US through the end of last year. The report has prompted speculation that the BoC may have to withdraw stimulus sooner than expected (we forecast no BoC rate hikes before 2023) as slack is withdrawn from the economy earlier than policy makers are anticipating. There is barely any flicker of that sort of thinking in short end rates at the moment, however, and policy makers here will have to settle on a policy course that charts around a Fed that is telling us it will allow the economy to run hot for a while," says Shaun Osborne, chief FX strategist at Scotiabank. "At the very least, solid economic data should keep the CAD on a firmer course overall for now."

November GDP growth was +0.7% and stronger than consensus had anticipated, which lifted many economists' estimates for the final quarter and came despite a second wave of coronavirus infections that prompted renewed closures of some businesses and fresh 'lockdown' in some parts of the country from late November. The data does no harm to the outlook for Bank of Canada (BoC) monetary policy and when combined with recovering oil prices, could be enough to ensure a continued bid for the Loonie. 

Above: USD/CAD shown at daily intervals with U.S. Dollar Index (orange). 

"An increasing number of (macro) indicators point to at least a temporary overshoot in inflation. In January, the ISM Manufacturing Prices Index, a subindex of the ISM Manufacturing Index which fell slightly but remained elevated, surged to 82.1, its highest level since April 2011," says Jeroen Blokland, a multi-asset portfolio manager at Robeco. "While base effects, most predominantly in oil, will push up inflation significantly in the coming month, the massive amounts of fiscal stimulus together with potential supply chain disruptions as a result of the Covid-19 crisis could also lift prices over the medium term. In an environment of real economy stimulus and rising prices, commodities are likely to do well. Hence, stick with an overweight."

Despite the Loonie's brightening outlook, it's not necessarily the case that it'll derail the Pound-to-Canadian Dollar rate, which is in the process of opening up a new and higher trading range which could see it reach 1.77 and its highest since March 2020 in the weeks ahead. Sterling has been boosted by rapid progress in the UK's coronavirus vaccination campaign.

This has seen 13% of the population receive a first shot of a vaccination in January and is giving the country an opportunity to achieve herd immunity within the year and potentially before the end of June. But further GBP/CAD upside could be limited ahead of Thursday's Bank of England (BoE) decision, in which the outcome of a study of negative interest rates will be announced.

"Risk appetite is stronger this morning on hopes for US fiscal stimulus and reduced fears about retail trading dislocation, but the USD is unmoved," says Daragh Maher, head of Americas FX strategy at HSBC. "Enthusiasm in equities is not provoking any RORO-related weakness. Invariably, the recent breakdown in the link between FX and equities will provoke talk of a new paradigm but it is too early to draw that conclusion based on a few days’ price action."

The Loonie will be sensitive to developments around spending plans in Washington where Democratic Party lawmakers filed a joint budget measure on Monday in the hope of progressing President Joe Biden's $1.9 trillion in Congress. The White House said later that Biden had "a substantive and productive discussion with Republican senators," noting "areas of agreement" and "areas which the Republican senators’ proposal does not address."

Republicans are reported to be proposing only a $900bln package but this didn't stop markets recovering some of last week's losses.

Above: Pound-to-Canadian Dollar rate at weekly intervals with Fibonacci retracements of pre- & post-referendum fall.