Canadian Dollar Rebound Curtails GBP/CAD’s Recovery of 1.73

• GBP/CAD struggling to sustain forays above 1.73
• Still underpinned by strong supports near 1.7160
• May rise further if USD/CAD holds 1.2665 support
• Dip below risks prompting GBP/CAD consolidation

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The Pound to Canadian Dollar exchange rate reached multi-month highs this week but was unable to sustain a foray above 1.73 following the market’s last minute bid for the Loonie, which pulled USD/CAD lower and may be likely to set the direction for GBP/CAD over the coming days.

Canada’s Dollar was a laggard among major currencies during much of the week while Sterling remained a prominent outperformer, although the gap between the two currencies was closing by Friday with the Loonie already having pulled GBP/CAD lower from Thursday’s high just above 1.73.

GBP/CAD’s Friday retreat was the culmination of a three-day decline in USD/CAD, which had slipped back beneath the 1.27 handle and toward an important level of technical support around 1.2665 during the opening session of the week.

“We still envisage a move to the 1.2530 area in the near-term, but we also see the loonie as an outperformer on the crosses,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets, referring to USD/CAD.

Whether USD/CAD remains supported around 1.2665 could be an important determinant of price action in the Pound to Canadian Dollar exchange rate over the coming days, with any break beneath it potentially enough to nudge GBP/CAD into a period of range-bound consolidation.

Above: GBP/CAD shown at daily intervals with Fibonacci retracements of December rally and 200-day moving-average highlighting likely areas of technical support for Sterling. Click image for closer inspection.

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GBP/CAD declines have recently been arrested by its 200-day moving-average that was located at 1.7157 on Friday, and which coincides closely with the 23.6% Fibonacci retracement of Sterling’s December recovery against the Canadian Dollar at 1.7160.

But GBP/CAD would come under pressure and potentially be pushed below those two support levels in the event that USD/CAD declines toward 1.2530 as is envisaged by the strategy team at CIBC Capital Markets.

The Pound to Canadian Dollar rate tends to closely reflect the relative performance of USD/CAD and its Sterling equivalent GBP/USD, and often demonstrates a positive correlation with USD/CAD.

“The CAD seems set to remain within its established 1.2650/1.28 range for now,” says Shaun Osborne, chief FX strategist at Scotiabank.

Above: USD/CAD shown at daily intervals with Fibonacci retracements of January rally highlighting likely areas of technical support for USD. Selected moving-averages denote possible support and resistance levels for USD/CAD. Click image for closer inspection.

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GBP/CAD could be likely to remain buoyant above the 1.7157 area so long as 1.2665 continues to draw dip-buyers in USD/CAD, which turned lower from Wednesday amid an easing of market concerns over developments in Ukraine and following the release of inflation data for January.

“If such a pattern holds until the end of the month, that would be the narrowest monthly range in ten years, which comes at odds with rather heightened geopolitical risks at present,” says Alexandre Dolci, an FX strategist at Credit Agricole CIB.

“FX investors could also have opted to stay on the sidelines as they eagerly seek more clarity on the tightening path of the BoC and the Fed, as they are both expected to deliver their first rate hike next month,” Dolci and colleagues said in a note to clients on Friday.

Canada and the UK released inflation figures on Wednesday and both surprised on the upside of market expectations, although more so in Canada where each of the three Bank of Canada (BoC) measures of core inflation climbed by 20 basis points when they had been expected to hold steady.

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

Canadian CPI inflation rose to 5.1% in January for the first time since 1991 while each of the BoC’s core measures rose further above the bank’s two percent target, and the surprise of market expectations is a leading candidate to explain the strength of the subsequent decline in USD/CAD.

“The inflation report reinforces the outlook for a 25bps hike but it was perhaps not the “smoking gun” that bolsters the case for a 1/2 point move in March,” Scotiabank’s Osborne and colleagues wrote in a Thursday market commentary.

The inflation data keeps the Bank of Canada on track to begin lifting its interest rate from a crisis-inspired low of 0.25% as soon as March, and is one reason why there are downside risks for USD/CAD and GBP/CAD in the months ahead.

Downside risks were inadvertently emphasized in a Wednesday speech from BoC Deputy Governor Timothy Lane, who told the University of Calgary’s School of Public Policy that policymakers would need to be nimble and willing to “act boldly” wherever circumstances require in the months ahead.

Deputy Governor Lane highlighted the role played by the BoC’s interest rate cuts and quantitative easing programme in minimising the damage done to Canada’s economy during efforts to contain the coronavirus, while also appearing to indicate that continued inflation surprises further out in the year could potentially draw a large and “forceful” interest rate response from the BoC.