Image © Bank of Canada
GBP/CAD has broken decisively above the 1.8842-1.8915 resistance zone, extending the bullish trend that has been building since late May.
Although the pound-to-Canadian dollar pairing has eased modestly after briefly trading above 1.9000, the pullback has so far been orderly, suggesting profit-taking rather than a reversal.
The RSI remains above 60, see lower panel in chart, indicating bullish momentum is still intact despite cooling from recent highs.
The key question for the week ahead is whether GBP/CAD can hold above former resistance, confirming the breakout and laying the foundations for another push towards the psychologically important 1.9000 level.
That former resistance looks to be a zone, as opposed to an exact point on the chart: it starts at the previous October's high at 1.8915 and runs through to ~1.8842.
A successful hold of the zone would reinforce confidence that buyers remain in control and increase the probability of another challenge of 1.9000.
However, a decisive daily close above the psychological barrier would expose 1.9100 as the next technical objective.
More broadly it would signal that the gravitational pull of the multi-month range, which centres around the 200-day moving average at 1.8850, continues to exert its influence.
Scotiabank: CAD Could Pick Up More Ground
The Canadian dollar has scope to strengthen further as improving domestic data and a moderation in U.S. dollar momentum combine to brighten the outlook, according to Scotiabank.
The Canadian bank says there is growing evidence that the loonie's weakness through May and June has come to an end.
"The late June stabilisation in the CAD is extending, and there may be a window opening up ahead for the CAD to pick up a bit more ground."
Scotiabank says it is becoming increasingly confident that the currency has found a floor, "we are increasingly confident that the CAD slide through May/June has been arrested."
A better-than-expected June employment report has reinforced that view.
While full-time hiring disappointed, overall job creation exceeded forecasts, unemployment fell and wage growth strengthened.
"Behind the data was also a mild increase in hours worked across the economy which should bolster expectations of some rebound in growth momentum through Q2," says Scotiabank.
Although the Canadian dollar barely reacted immediately after the release, Scotiabank says the report was positive overall.
The bank also notes that the flow of economic data has started to turn in Canada's favour.
"Data surprise trends are shifting in the CAD's favour - fewer downside misses for Canadian reports and a moderation in US data upside surprises."
Scotiabank cautions that exchange rates typically respond with a lag as investors gradually adjust interest rate expectations.
That is important because widening U.S.-Canada yield spreads have been one of the principal drags on the Canadian dollar in recent months.
"The front-end yield spread story has been the CAD's 'kryptonite' since May but differentials may be peaking and we expect the spread to reverse meaningfully deeper into H2."
The bank also believes the U.S. dollar's powerful rally is beginning to lose momentum.
"Oscillators reflect a very overbought USD in the early stages of correcting."
Attention now turns to a busy week for North American markets.
In the United States, inflation data and testimony from Federal Reserve Chair Kevin Warsh could reshape expectations for further rate hikes.
Scotiabank continues to believe markets have become too aggressive. "We continue to view swaps pricing in 33bps of Fed tightening risk this year as too rich."
In Canada, the Bank of Canada is widely expected to leave interest rates unchanged, with policymakers likely to maintain a wait-and-see stance as they assess the evolving economic outlook.
Against that backdrop, Scotiabank believes further Canadian dollar gains are achievable if U.S. inflation data soften and global risk sentiment remains stable.
"The lower end of that range is reachable if US economic reports are soft (and the broader risk backdrop remains contained), we think," says Scotiabank.
