GBP/CAD steadies near 1.63, aided by USD/CADDual downtrends slowing as U.S. yields take flightAhead of FOMC minutes & as risk appetites fade

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The Pound to Canadian Dollar exchange rate was steadier near to 2022 lows during the opening half of the week amid signs of a possible short-term rebound taking shape on the USD/CAD charts, although some strategists continue to view GBP/CAD as a ‘sell on rallies’ currency pair.

Canada’s Dollar eased lower during the midweek session when U.S. government bond yields took to the air while falling stock markets and rising energy prices indicated a fading appetite for risk on international markets.

USD/CAD extended its Tuesday rebound from 1.24 to trade a short distance above 1.25 in price action that had a stabilising influence on the Pound to Canadian Dollar exchange rate following a six-week long period of declines.

“Intraday price action (bullish hammer) suggests some risk of a squeeze higher in the USDCAD in the next day or so. The broader trend lower remains deeply entrenched across short, medium and longer-term trend oscillators, however,” says Juan Manuel Herrera, a strategist at Scotiabank.

“On the downside, the GBP’s slide below key supports and significant bear trend momentum suggests that losses may extend towards the 1.58/1.60 region in the months ahead. Minor GBP rallies remain a sell,” Herrera and colleagues had said in a Tuesday review of the Canadian Dollar charts.

Above: Pound to Canadian Dollar rate shown at hourly intervals alongside USD/CAD. Click image for closer inspection.

U.S. yields were higher again on Wednesday as attention turned to a forthcoming release of minutes from the March Federal Reserve (Fed) policy meeting, which Chairman Jerome Powell previously said would contain details of a plan for the process known as “quantitative tightening.”

“Yesterday it was the turn of Brainard, who is awaiting Senate confirmation to serve as vice chair, to turn up the tone of Fedspeak,” says Jane Foley, head of FX strategy at Rabobank.

“In particular, her use of the word ‘rapid’ to describe the pace of balance sheet reduction combined with her hint that this process could start as soon as the May meeting provided one of the first insights into how the Fed is approaching QT,” Foley also said in a Wednesday review of Rabobank's EUR/USD forecasts.

Quantitative tightening will see the Fed begin shrinking a balance sheet that swelled to near-$9trillion in the last two years as the bank bought government and mortgage bonds to support the U.S. economy under its pandemic-inspired quantitative easing programme.

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“It’ll be faster than the last time and of course it’s much sooner in the cycle than last time. But it will look familiar. I would just say I’m sure there’ll be a more detailed discussion in the minutes of our meeting that will come out in three weeks,” Chairman Powell said in last month’s press conference.

Whether in May or after the anticipated decision will come as part of an effort to contain rising rates of inflation through a normalisation of U.S. monetary policy settings and it’s likely to be an important influence on U.S. government bond yields over the coming months.

"Yesterday’s price action highlights increased reservations about chasing downside for now. Indeed, a move above the 1.2550 mark today should confirm yesterday’s hammer reversal candle and buttress our tactical view that the pair is headed higher in the short-term," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"Our near-term fair values suggest that price action should be closer to the 1.2550 area, though our target is at 1.2700 for now. This view is wrong if we take out the 1.2390 mark," Rai also said in a Wednesday market commentary.

Above: USD/CAD shown at daily intervals with Fibonacci retracements of March downtrend indicating possible areas of short-term technical resistance, and shown alongside spread - or gap - between 02-year U.S. and Canadian government bond yields. Click image for closer inspection.

While markets were heavily fixated on the forthcoming release on Wednesday, they were also keeping one eye on developments in and around Ukraine where an alleged Russian massacre of unarmed civilians has inspired a push for further sanctions from G7 countries and the European Union.

The allegations have further raised tensions between Russia and others while lifting oil and natural gas prices, which have weighed on many European currencies in recent trade including the Euro and Sterling.

Rising energy prices and the resulting squeeze on corporate and household incomes have recently led the Bank of England (BoE) to become more cautious with guidance about the outlook for Bank Rate, which financial markets have speculated could rise from 0.75% to 2% later this year.

That has weighed heavily on Sterling including GBP/CAD, which tends to closely reflect the relative performances of both the Pound and the Loonie but when each is measured against the U.S. Dollar.

It’s for this reason that GBP/CAD would likely benefit further if the nascent rebound in USD/CAD continues over the coming days.

“USD/CAD failed to close below support at 1.2451 yesterday, with the stern rejection of the low at 1.2403 leading to the formation of a dragonfly doji pattern. A daily close above resistance at 1.2540 would amplify this reversal pattern and expose the 1.2600 area next on the topside,” says Adam Cole, chief FX strategist at RBC Capital Markets.

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of late February decline indicating possible areas of short-term technical resistance, and featured alongside spread - or gap - between 02-year UK and Canadian government bond yields. Click image for closer inspection.