GBP/CAD Forecasts: GBP Looking Strained, US Dollar Forcing Through Trend Shift

Pound sterling continues to attract heavy selling interest at current levels against the Canadian dollar and is finding it increasingly difficult to press recent gains, however studies confirm the upside is preferred in the near-term.

• GBP/CAD forecast towards 1.9150, week’s close will be instructive on longer-term prospects
• USD/CAD breaking through key technical barriers, advocates for further advances
• CAD weakness is not guaranteed as foreigners continue to show demand for an undervalued Canadian stock market

The upward shift in GBP/CAD is starting to struggle according to the most recent studies conducted on the pair.

Sterling has recovered off lows around the support area at 1.8080 which halted declines in April.

The subsequent recovery has seen some key technical barriers broken which has triggered a positive shift in tone on sterling’s outlook.

Indeed, momentum indicators remain positive with the GBP to CAD now trading above the 50 day moving average. We would set our target at the layer of sell orders clustered around the 100 day moving average which is presently noted at 1.9125.

However, others are not so confident on sterling’s prospects.

“GBPCAD is grinding out marginal gains creeping higher but GBP strength continues to attract sellers, with markets showing little confidence in the GBP’s staying power,” says Shaun Osborne, lead FX strategist with Scotiabank.

Osborne agrees though that the trend is up, based on technical observations, particularly on the shorter-dated charts.

While the pace of ascent in GBP/CAD may be slowing there is consensus that base formed in April is indicative of an important support area forming.

We would therefore suggest that those with GBP-CAD currency transfers look to the floor from which to base future buy orders. We wold think that a stop-loss order for any transaction should be based on the observation of this support area.

Scotiabank’s Osborne will be looking to see how this week closes out for the pair as it will be crucial in gauging GBP/CAD’s prospects over the longer-term.

“We continue to think that a higher weekly close this week will add to bullish/positive momentum. We spot retracement resistance at 1.8767 but think the 1.9150/1.92 area may be tested near-term. We expect short-term dips are likely to remain limited in nature (1.84/1.85),” says Osborne.

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8615▲ + 0.07% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7982 - 1.8056
**Independent Specialist	1.8354 - 1.8429 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

US Dollar Forcing Through a Shift in Trend

Turning to the headline USD to CAD exchange rate pairing the bounce off the early may lows betrays a similar tone to that seen in GBP/CAD.

“Trend signals are shifting, providing confirmation to the bullish momentum indicators. The 9 day
MA is above the 21 day MA for the first time since late January. USDCAD risk lies to the upside and we look to a clear break above the 50 day MA (1.2987) with expectations of gains toward 1.3150. Near-term support levels include 1.2900, 1.2880, and last week’s congestion level 1.2850,” says Osborne’s colleague at Scotiabank, Eric Theoret.

Again this week’s close in USD/CAD will be highly instructive to the longer-term outlook.

“Shorter-term trend oscillators are aligning positively for the USD still and bearish weekly signals are moderating significantly. A broader alignment of these signals would provide a higher degree of confidence that the USD rally will extend,” says Osborne.

However, TD Securities continue to think risks are tilted towards a rise to 1.33/1.35 in the next few weeks.

“Buy USD dips,” says Osborne.

Some Hope for CAD to Find Strength Again

CAD’s deterioration on the charts is of course a reflection of fundamental developments pertaining to global financial currency flows and domestic economic developments.

The technical charts are incredibly important in betraying the structure of the underlying market, and therefore allowing those with an interest in the market to make the best possible decisions on where to buy and sell.

However, for the broader trends to remain in the trend of disappointment on headline Canadian data points must continue.

We know Canada’s economy is cooling off after a recent out-performance and oil prices’s are struggling to sustain their recovery this May.

Oil has kept below $44 after reaching peaks last month of above $46.

“The loonie’s run could also come to a screeching halt as the USD regains some vigour in synch with a less dovish Fed. A stronger USD often translates to weaker oil prices, a potential double whammy for the loonie later this year,” says Stéfane Marion, Chief Economist and Strategist at NBF Economics and Strategy in Montreal.

Marion warns that the game is not yet up for the CAD as the currency can still count on portfolio inflows.

International securities transactions data show foreigners ramping up purchases of Canadian equities and that explains in part why the TSX is comfortably topping the developed world’s stock markets so far this year.

“That favourable trend could continue considering Canadian equities remain relatively cheap based on PE ratios - if one excludes the depressed resources sector, the difference between US forward PE’s and Canadian ones is high by historic standards,” says Marion.