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Pound-Canadian Dollar Week Ahead Forecast: Struggle to Hold 1.75 On Any Global Market Recovery

- GBP/CAD support around 1.75 & 1.7340 further down
- But may struggle to keep head above water this week
- As global markets steady and CAD seeks to pare loss
- But CAD data flow & political risk also limits downside

Canadian Dollar outlook

  • GBP/CAD reference rates at publication:
  • Spot: 1.7515
  • Bank transfer rates (indicative guide): 1.6902-1.7025
  • Money transfer specialist rates (indicative): 1.7357-1.7430
  • More information on securing specialist rates, here
  • Set up an exchange rate alert, here

The Pound-to-Canadian Dollar rate had four-month highs in sight early in the new week but would struggle to attain them if stabilising global markets lead the Loonie to pare earlier losses of its own, although Canadian political uncertainty may limit any declines.

Canada's Dollar was hands down the worst performer in the G10 segment of major currencies for the week to Monday after its sensitivity to oil, other commodity prices and the trajectory of global stock markets each helped to lift GBP/CAD and USD/CAD sharply in recent trading.

The Pound-to-Canadian Dollar rate reached 1.7565 and its highest since April when rising alongside U.S. exchange rates last week, in a period when markets grew more fearful for the global economic outlook.

"Markets are confused and unhappy. Alpha or Delta? Inflation or deflation? And “geopolitics” every which way. As such, US stocks went down on Friday, and by a non-negligible amount, while US Treasury yields went up, not down," says Michael Every, a macro strategist at Rabobank.

Global risks have come to the fore of concerns at a point when many major developed economies are believed to be slowing mechanically as a result of sharp rebounds induced by earlier reopenings from coronavirus-inspired closures of businesses.

GBPCAD daily

Above: Pound-to-Canadian Dollar rate shown at daily intervals with major moving averages indicating areas of technical support from 1.7340 down, and shown alongside USD/CAD.

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The sheer scale of losses and the consequent rebounds was always going to give way to volatility in data and a generally slower pace of expansion, but this hasn’t stopped investors fearing that new pandemic-related risks are behind recently-poor data from many economies.

Recent economic outcomes have favoured the advance of GBP/CAD after the UK still eked out some growth in July even as it nearly stalled in the wake of a 4.8% second quarter rebound, while Statistics Canada has warned of a July GDP decline after announcing a surprise contraction for last quarter.

But much about this week’s likely GBP/CAD performance depends on price action in USD/CAD and there’s reasons for why the Loonie could struggle to push USD/CAD as low as it would need to in order to really upend GBP/CAD.

"USD retains a fair degree of bullish trend momentum on the daily and weekly DMI oscillators but longer run charts also reflect persistent selling on strength over the past two months and spot has pressured daily support (40-day MA) at 1.2593,” says Shaun Osborne, chief FX strategist at Scotiabank.

"Our projected range suggests CAD gains could stretch to the low 1.24s in the week ahead," he says.

The GBP/CAD always closely reflects the relative performance of GBP/USD and USD/CAD, and would still remain stubbornly supported close to the round number of 1.75 if GBP/USD makes it back to 1.39 and at the same time USD/CAD is for any reason unable to get beneath last week’s lows near 1.2593.

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GBP/CAD tends to correlate closely with USD/CAD and the latter has been lifted as well as supported of late by uncertainty resulting from the current ongoing Canadian election process.

"Political risk may cap CAD gains for now. Once political uncertainty dissipates, a short-term undervaluation vs USD (2.1%, according to our fair value model) and solid fundamentals all point to a rebound in the loonie, in our view," says Francesco Pesole, a strategist at ING.

A tight race ahead of the September 20 general election has fomented uncertainty about future government policy and could continue to limit the Canadian Dollar’s recovery potential as well as GBP/CAD's downside risk this week even as global markets stage a rebound.

Nonetheless, many analysts have suggested that candidates’ policy positions are too similar to have significantly differing impacts on the performance of the economy over the medium-term, while once beyond September 20 other domestic factors could become more dominant for the Loonie.

"We continue to think that the BoC remains on track to taper at the October MPR meeting, with a small amount of risk that the next step is delayed due to a worsening virus situation, and retain our preference for CAD longs versus USD," says Michael Cahill, a G10 FX strategist at Goldman Sachs.

GBPCAD weekly

Above: Pound-to-Canadian Dollar rate shown at weekly intervals with major moving-averages indicating areas of possible support from 1.7273 down.

Cahill and the Goldman Sachs team recently cited elevated levels of inflation, a robust job market recovery, normalising Bank of Canada policy and an expected global economic recovery as among reasons to expect a USD/CAD slide as far as 1.21 over the next three months.

Their forecasts also suggest this USD/CAD move will push GBP/CAD beneath Monday’s 1.75 and as far as 1.7061 in time for year-end.

The anticipated job market recovery was confirmed already by Statistics Canada figures for August last Friday while the elevated levels of inflation may be placed on display again this Wednesday when August’s reading of the Canadian consumer price index is released at 13:30.

The week ahead is a busy one for Sterling too and is expected to see the British government announce renouncing the use of further restrictive containment measures as part of a new strategy to manage any autumn coronavirus surge.

Reports of which came ahead of Sunday’s revelation by Health Secretary Sajid Javid that earlier plans to require ‘vaccine passports’ for entry into certain venues from next month have been scrapped.

"Sterling will look to build on last week's gains if employment/wages and CPI data this week bolster the case of the four hawks on the BoE’s MPC and shorts are forced to cover," says Kenneth Broux, strategist at Societe Generale.

"Even though the CAD trades cheap by around 1% based on WTI, it is proof that investors are dodging the Loonie before the elections on Sunday, where the outcome is on a knife-edge. Hedge funds raised short CAD positions last week to 3.5% of open interest from 1.7%,” Broux says.

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