Pound / Canadian Dollar Outlook: Key Support Level Continues to Reject CAD's Advances, Look for More GBP Strength

This week's announcement by OPEC that oil production would be curtailed has failed to help the Canadian Dollar in it's quest to strengthen against Pound Sterling.

OPEC this week announced the first production cut in 8 years and is a sign of intent that some of the world's largest oil producers are willing to set aside differences to address what amounts to a 50% drop in crude prices over the past 2 years.

Oil prices rose strongly on the announcement.

The Canadian Dollar rallied on the news as the country's current account relies heavily on oil exports.

The GBP/CAD exchange rate fell from a day's best at 1.7236 to close at 1.7012.

However, over the course of Thursday/Friday we note the exchange rate has risen to 1.7055 suggesting little follow-through buying interest in CAD.

It also confirms 1.70 as a significant support line for GBP/CAD which has not closed below this level since mid-August:

We wrote prior to the OPEC announcement, GBP/CAD pair is in a mini up-trend higher, which had broken above the 50-four hour moving average, and moved up to resistance at 1.7244.

The observation remains valid in our view and over coming days this short-term up-trend could continue higher, at least as far as 1.7350, possibly even higher to significant resistance at 1.7400.

The way the MACD has formed a bullish ‘rounding pattern’, which tends to indicate an important reversal in momentum higher, is further evidence to support a continuation of the current up-move.

So technically speaking, the OPEC deal has not necessarily lead to a deterioration in the outlook for the GBP/CAD exchange rate.

Indeed, as we have noted here, many analysts question whether the deal will actually ever be implemented.

In the past we would have expected the Canadian Dollar to strengthen further on any oil price rises but as analysts at CIBC point out, the currency seems to be losing its correlation with the commodity.

If so, then we should keep a closer eye on the Bank of Canada policy making process and watch the evolution of domestic data for guidance on CAD direction in the future.

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8599▼ -0.01% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7966 - 1.8041
**Independent Specialist	1.8338 - 1.8413 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Headwinds Ahead for the Pound

The Pound has been supported by relatively strong data of late, which seems to show the economy in rude health after Brexit.

However, headwinds continue to blow.

Sterling should be higher were it not for growing speculation that the government is gearing up for a complete withdrawal from Europe, including the trading club element called the common market.

International Trade Secretary Liam Fox has now sought for the UK to become an independent member of the World Trade Organisation - some would argue this is a pragmatic development but according to analysts at Citibank it could be seen as, “a clear signal of preparing the ground for an 'hard Brexit', which would involve leaving the EU’s single market entirely.”

The problem for Britain is that access to the EU's single market also requires the handing over of inter-European immigration controls, which is at odds with the sovereignty desired by the majority who voted for Brexit.

The issue has also been highlighted by Switzerland whose government has been making efforts to negotiate tighter immigration controls whilst maintaining access to the common market.

In the Swiss case, the EU would not budge on the principle of freedom of movement, so the Swiss had to hold a referendum on whether to quit the common market or tighten immigration controls.

“The Swiss parliament has chosen continued access to the EU’s single market over immigration controls demanded by a 2014 referendum, after unsuccessful negotiations with the EU. This points to a tough EU stance and difficult negotiations ahead for the UK as well,” argue Citi.

Indeed, we have heard from many analysts over recent days that one of their core reasoning for expecting a weaker British Pound remains the uncertainty posed by the difficult Brexit negotiations that lie ahead.

Continue to watch the newswires for further developments on this story as we expect GBP to remain sensitive to such headline risks.