Pound-Canadian Dollar Rate May Struggle for Momentum Above 1.7350

- GBP/CAD may struggle after strong start to week
- Support at 1.7284, 1.7220; ebbing above 1.7350
- CAD eyes CPI & GDP data in quiet UK data week

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• GBP/CAD reference rates at publication:
• Spot: 1.7280
• Bank transfer rates (indicative guide): 1.6675-1.6796
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The Pound-to-Canadian Dollar rate saw a strong start to the week but could struggle to sustain its upward momentum beyond Tuesday's 1.7350 level, and may even be susceptible to a corrective setback that sees it slip back below 1.73 over the coming days.

Sterling was the outperformer among major currencies to open the new week, recovering above a key moving-average against the Canadian Dollar in price action that many observers connected to a loss of momentum behind the new coronavirus strain in the UK.

But the scale and breadth of Monday’s move indicates the market may have overestimated the extent to which the Pound was really burdened by the heightened focus on escalating infection numbers in the UK, and that it may have underappreciated the impact of recent commentary from Bank of England (BoE) rate setters.

“It is still too early to determine whether England’s full reopening last Monday will see case counts climb, but for now GBP sentiment should see some improvement ahead of a distinctly uneventful domestic calendar,” says Shaun Osborne, chief FX strategist at Scotiabank.

For the Pound-to-Canadian Dollar rate, the lion’s share of its recent declines came after last Monday’s remarks from Monetary Policy Committee (MPC) members Jonathan Haskel and Catherine Mann challenged the idea that the BoE could be nearing a majority in favour of a change to its quantitative easing or interest rate policy.

Above: GBP/CAD shown at hourly intervals alongside GBP/USD and CAD/USD. Annotated with granular detail of recent price action.

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It was BoE commentary remarks which pulled GBP/CAD back below 1.75 last Monday, with subsequent gains and losses coming mainly as a result of moves in the main Canadian exchange rate USD/CAD, which were connected to volatility in oil prices and swings in investor appetite for risk assets.

“The Bank of England is not sending signals that it plans to turn more hawkish at the upcoming August meeting, despite a rise in realized inflation,” says Sheena Shah, a strategist at Morgan Stanley.

“A hawkish BoE outcome and thus GBP reaction would be from the result of any vote to stop asset purchases early (our economists don't think there is a majority for this or support from BoE Governor Bailey) or if the growth projections are adjusted such that this would require tighter policy in 2022,” Shah writes in a recent note.

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The Pound-to-Canadian Dollar rate will be sensitive again this week to the trajectory of USD/CAD, which has fallen back below 1.26 after having come within inches of 1.28 last week.

GBP/CAD always closely reflects relative price moves in USD/CAD and the main Sterling exchange rate GBP/USD, and has recently had a better correlation with USD/CAD than it has GBP/USD.

The week ahead is a quiet one for the UK economic data calendar while the Canadian Dollar will have June’s inflation data and May’s GDP number to contend with on Wednesday and Friday respectively, which is another reason for why GBP/CAD could be likely to follow USD/CAD this week.

Above: USD/CAD shown at daily intervals alongside GBP/CAD.

“USDCAD has moved into a very tight range after recently breaking back below the 200-day average at 1.2608/13. Nevertheless, a major base remains in place and the market remains in the clear uptrend from the start of June, suggesting that last week’s pullback is corrective only,” says David Sneddon, head of technical analysis at Credit Suisse.

“We therefore stay bullish, with a move above 1.2608/13 needed to confirm the uptrend is resuming,” Sneddon says.

The USD/CAD recovery envisaged by Credit Suisse would be supportive of the Pound-to-Canadian Dollar rate although Sterling would likely fall and potentially back below 1.73 if RBC Capital Markets is instead right with its competing outlook for a USD/CAD turn lower.

“Near-term support at 1.2538 remains in play as a corrective pullback unfolds in USD/CAD, with a daily close below here opening up the 1.2500 area ahead of 1.2428,” says Adam Cole, chief FX strategist at RBC Capital Markets.

Canada’s inflation figures are due out on Wednesday at 13:30 while the May GDP report is scheduled for the same time on Friday, while the Loonie may be sensitive to any implications for Bank of Canada (BoC) monetary policy.

“It will be worth keeping an eye on the inflation data next week to see if there are signs that demand tied to the reopening translated into higher prices for some goods and services in June. The GDP data for May is old news,” says Royce Mendes, an economist at CIBC Capital Markets.

“We do, however, expect that the early look for June GDP will show a solid rebound coinciding with the relaxation of restrictions across the country,” Mendes adds.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 200-day moving-average in black and Fibonacci retracements of recovery from May lows indicating possible levels of support.