Pound-to-Canadian Dollar Uptrend Neutralises, HSBC Eyes 1.73 for Quarter-end

- GBP/CAD upturn shows signs of fading after UK’s GDP report
- Q2 outcome keeps uncertainty about BoE’s rate outlook alive
- HSBC forecasts tip 1.73 for quarter-end & 1.70 by year-end

Canadian Dollar

Image © Adobe Stock

  • GBP/CAD reference rates at publication:
  • Spot: 1.7323
  • Bank transfer rates (indicative guide): 1.6717-1.6838
  • Money transfer specialist rates (indicative): 1.7167-1.7200
  • More information on securing specialist rates, here
  • Set up an exchange rate alert, here

The Pound-to-Canadian Dollar rate dipped briefly below 1.73 ahead of the weekend amid signs that its recent uptrend is neutralising, an idea that is only encouraged by the latest HSBC forecasts, which suggest GBP/CAD could struggle to recover meaningfully above the level from here and that it may be likely to end the year somewhat lower around 1.70.

Sterling has traded soggily since Thursday’s second-quarter GDP report from the Office for National Statistics, leading the Pound-to-Canadian Dollar rate to fall from near 1.74 earlier this week to probe briefly beneath 1.7300 handle by Friday.

UK GDP by 4.8% in the three months to the end of June, in line with market expectations but a tad below the more upbeat outlook illustrated by the August forecasts from the Bank of England (BoE), which had envisaged an expansion of 5%.

The economy remains on course to recover all of the GDP lost to coronavirus containment measures by the time the curtain closes on 2021 but Thursday’s slight underperformance of the bank’s forecast looks to have inspired profit-taking in some parts.

This could be because with the economy lagging BoE assumptions, however slightly, investors are disincentivized from wagering more heavily that an interest rate rise would be necessary before the end of 2022 when as recently as last week that had seemed to many like an increasingly good prospect.

“A concern for GBP bulls might be that the market envisages very little more in terms of rate hikes over the next few years, which corroborates the Bank’s thinking that the UK’s neutral rate has fallen in recent years,” says Paul Mackel, global head of FX research at HSBC.

GBPCAD daily

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

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

“With significant economic uncertainty still ahead as government support schemes roll off through Q3 and Q4, the Bank is likely to proceed very slowly with any shift towards tightening,” HSBC’s Mackel adds.

The BoE pointedly flagged in its August policy update that “modest tightening” through changes to its interest rate and quantitative easing policies could be necessary in the coming years in order to ensure the rate of UK inflation returns to the bank’s 2% target over the coming years, from what was forecast this month to be a peak of around 4% that is likely to be seen in the final and first quarters of 2021 and 2022.

But that outlook was contingent on numerous assumptions including a strong economic recovery through the rest of 2021, a seamless winding down of HM Treasury’s furlough scheme that leaves the unemployment rate unchanged as well as the idea that a robust performance from the job market would keep alive the risks of increased wage growth that could further fuel underlying inflationary pressure in the economy over coming years.

“The UK economy doesn't need to record a miraculous Q3 and Q4 in order for the Bank's 7.25% growth forecast for the year as a whole to be met; even with growth averaging 0.3% per month in Q3, we estimate that 6.5-7.0% growth for the year is still possible, provided economic conditions do not severely relapse due to some sort of exogenous shock,” says Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

HSBC GBP forecasts

Above: HSBC forecasts for Pound Sterling exchange rates. Quarterly projections with year-end 2021 in grey shaded column on right hand side. Projections for the first and second quarters of 2022 are shown in the final two right hand columns.

{wbamp-hide start}

Global Reach Banner

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

Thursday’s data and the uncertainties about other moving parts underpinning the BoE’s policy outlook could mean that Sterling struggles to get up much fresh momentum over the coming weeks, although this is by no means a widely held view in the market.

“The BoE expects the pace of economic growth to slow but remain robust,” says Lee Hardman, a currency analyst at MUFG. “We still expect a stronger pound in anticipation the UK economy will continue to recover and prompt the BoE to follow through with their plans for gradually tightening policy.”

The Pound-to-Canadian Dollar rate may yet struggle in the interim if the Loonie continues to show the same resilience that it has done throughout the current week, although its prospects are hinged on price action in a USD/CAD rate that has itself been consolidating throughout the August month, but which could yet keep GBP/CAD under pressure if it continues to test the nearby 1.25 level.

“The forecast of modest depreciation in the CAD relative to the USD is not reflective of any particular concern about the Canadian economy,” says HSBC’s Mackel, who looks for USD/CAD to edge higher toward 1.26 heading into the end of September, before ending the year at 1.27.

CAD exchange rates

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

The risk of continued resilience from the Loonie to the recently-stronger U.S. Dollar is something that could potentially lead the Pound-to-Canadian Dollar rate to be steadily confined to another range consolidation in the weeks ahead, like that seen between April and late July.

HSBC’s forecasts anticipate however that both the Pound and Canadian Dollar rate will weaken steadily against the greenback through the rest of the quarter and into year-end, just with Sterling proving more resilient over the coming weeks only to then trade places with the Loonie in the final quarter.

The U.S. Dollar has strengthened in tandem with a seemingly rising probability of the Federal Reserve (Fed) announcing either in September or soon after a plan to gradually wind down its crisis-inspired quantitative easing programme.

The Pound-to-Canadian Dollar rate always closely reflects the relative price action seen in USD/CAD and the main Sterling exchange rate GBP/USD, the latter of which is tipped by HSBC to slip back toward 1.37 in September before ending the year at 1.34.

The net result for the Pound-to-Canadian Dollar rate is a quarter-end finish around the 1.73 handle that was seen on Friday ahead of a decline to 1.70 by the time the curtain closes in 2021.

“Activity signals suggest the expected Q3 bounce amid reopening and a successful vaccine rollout will materialize, although there is still much slack in the labour market to be absorbed. With 50bp of tightening already priced in for the next 12 months, and another 50bp in the year thereafter, the scope for the BoC to add to CAD enthusiasm is limited, especially with global economic momentum slowing,” Mackel says of Canada’s economy.

CAD daily rates

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