Pound to Canadian Dollar: GBPCAD Can Retest Recent Highs

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Pound Sterling will err to the upside against the Canadian Dollar.

The Pound to Canadian Dollar (GBPCAD) exchange rate spiked to a high at 1.8163 on Monday amidst fears the U.S. would proceed with a 25% import tariff, but this proved the limit for the rally.

On the announcement that tariffs would be delayed, and amidst signs they will ultimately be far less severe, the Canadian currency recovered its losses.

The spike and failure means GBPCAD the ceiling at 1.8150 before retreating once again, repeating a now familiar pattern that is etched onto the daily chart:

Anything around 1.8150 and above simply looks too expensive for GBPCAD at present, and the level should remain out of reach over the coming days unless U.S. President Donald Trump surprises with fresh gripes about the U.S.-Canada relationship.

Weakness in GBPCAD will likely be shallow given the ongoing uncertainty regarding the outcome of the negotiations that are underway between the U.S. and Canada, which makes the deadline set at the end of the month a high-risk event for CAD.

This can allow GBPCAD to err to the upside over the next three weeks and a retest of 1.8163 is a possibility, although breaking into clear air above here would require a messy outcome to the current negotiations.

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"Dollar bloc currencies including CAD, AUD and NZD, and the EUR are in the firing line, following the decline in short term bond yields vs the US as investors pare back growth expectations," says Kit Juckes, an analyst at Société Générale.

The Bank of Canada said in its January policy decision that the simple threat of U.S. import tariffs on Canadian goods is weighing on consumer and business confidence and investment intentions.

"This threat has also contributed to the recent depreciation of the currency," says Juckes.

Analysts at Goldman Sachs maintain a bearish stance on the Canadian Dollar, judging that a fundamental adjustment is underway in Canada-U.S. relations that the currency must reflect.

Analysts at the Wall Street bank estimate that the Canadian Dollar could weaken by around 13% to a permanent 25% across-the-board tariff if the currency followed the typical response to a change in the Terms of Trade.

"A lower initial tariff on energy products, which account for around a quarter of Canada’s exports to the US, lowers that estimate slightly, but given the uncertainties at play we still think that is the right ballpark as a theoretical final resting place," says Goldman Sachs in a recent note.