- GBP/CAD’s November lows may mark end of the sell-off
- Recovery to 1.7080 likely in short-term, charts suggest
- GBP/CAD could attempt return to 1.75+ in medium-term
- Turnaround comes alongside extended advance for USD
- But BoE & BoC policy risks loom in December & January
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The Pound to Canadian Dollar exchange rate (GBP/CAD) has made a spirited attempt at recovery from new 2021 lows established in the opening week of November and some chart watchers suspect the resulting price action marks a turning point for Sterling.
Sterling unravelled as far as 1.6733 against the Canadian Dollar during the opening days of November only to reverse higher when this month’s U.S. inflation data gave new life to a multi-month U.S. Dollar rally, bringing with it a moment of respite to GBP/CAD.
GBP/CAD rate fell steadily for eight weeks previously and despite handing back some recent gains in its retreat from this Monday’s high of 1.7050, Sterling had still reversed much of the earlier sell-off.
“Price action looks a bit more positive for the GBP now, with weekly price patterns carving out a bullish “morning star” signal, through the close of last week,” says Juan Manuel Herrera, a strategist at Scotiabank.
“We think the pound can push on to test 1.7085—which now figures as key resistance for the cross—in the next week or so,” Herrera and colleagues wrote in a Tuesday research note.
The Pound-Canadian Dollar recovery has unfolded since the first day of trading after Bureau of Labor Statistics data showed the main U.S. inflation rate rising above 6% for the month of October, encouraging another leg higher in U.S. exchange rates in the process.
Above: GBP/CAD rate shown at daily intervals.
- Reference rates at publication:
GBP to CAD spot: 1.6880
- High street bank rates (indicative): 1.6290 - 1.6408
- Payment specialist rates (indicative: 1.6730 - 1.6797
- Find out about specialist rates, here
- Or, set up an exchange rate alert, here
U.S. inflation reached its highest since November 1990 and drew suggestions from four Federal Reserve policymakers that it could become necessary in the months ahead for the bank to taper its quantitative easing programme at a faster pace, which may have knock-on implications for interest rates.
The Pound has been more resilient to the resulting U.S. Dollar rally than its Canadian counterpart, potentially due to its typically lower sensitivity to changes in investor risk appetite and the fact that GBP/USD had already fallen heavily earlier in the month.
“The rebound from the 1.67 area does rather support the notion of solid, long run support for the GBP in the 1.67/1.68 region and we think an (eventual) push through 1.7085 should target additional gains towards 1.75/1.76,” says Scotiabank’s Herrera.
GBP/CAD often benefits from a rising USD/CAD rate and always closely reflects the relative performance or differing performances of USD/CAD and the main Sterling exchange rate GBP/USD.
“Seasonal trends do turn more USD-negative in December but trend signals are aligned constructively for the USDCAD at the moment, suggesting limited downside scope for funds for now. Key support is 1.2575/85,” Herrera also said.
USD/CAD’s November advance has helped place a floor under the Pound-Canadian Dollar rate although as December gets underway Bank of England and Bank of Canada interest rate policies will be back in focus and could pose risks to Sterling.
Pricing in the overnight-indexed-swap market indicated on Wednesday that investors see around a 50/50 chance of the BoE lifting Bank Rate from 0.10% to 0.25% on December 16, making that a coin toss for the market that poses both up and downside risks to GBP/CAD.
“Employment in Canada has returned to pre-pandemic levels in Covid-sensitive sectors in some regions, suggesting it could continue to improve across the country; wage growth has also picked up, and business sentiment has been elevated,” says Michael Cahill, a G10 FX strategist at Goldman Sachs.
Above: USD/CAD shown at daily intervals with U.S. Dollar Index.
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While the USD/CAD trend has been supportive of the Pound-Canadian Dollar recovery through much of November, the Loonie could turn to a headwind in the new year if Goldman Sachs is right in its forecast that the Bank of Canada (BoC) is likely to lift its cash rate to 0.50% in January.
“Capacity pressures are pushing down estimates of potential growth over the next year, but are also likely to result in an earlier closure of the output gap, leading our economists to argue that the BoC is well on track to hiking in January,” Cahill and colleagues wrote in Goldman Sachs’ 2022 outlook.
The BoC’s October policy announcement weighed heavily on GBP/CAD after the bank brought forward its estimate of the time when it expects Canada’s economy to be in a position to sustainably deliver its 2% inflation target to the second quarter of 2022.
However, the danger is that rising inflation pressures lead the BoC to turn increasingly ‘hawkish’ in the months ahead, which could encourage fresh outperformance by the Loonie and weigh on the Pound-to-Canadian Dollar rate next year.
“Out of the small open G10 economies, CAD seems best-positioned to benefit from the broader central bank divergence and a fairly strong domestic economy,” Cahill and colleagues also said while tipping the USD/CAD rate for a slide to 1.22 over the next three months.
Goldman Sachs’ three-month forecast of 1.22 for USD/CAD is a bearish omen for the Pound-to-Canadian Dollar rate, which the bank tips for a decline to 1.6471 by the early months of 2022.
Above: Pound-to-Canadian Dollar rate shown at weekly intervals.