GBP/CAD eating into resistance around 1.7250With technical picture turning bullish on charts GBP buoyant as CAD softens in new year trade

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate was on course for a hat-trick of gains in midweek trade and could have scope to rise toward September 2021 highs above 1.75 over the coming weeks, according to the latest technical analysis from Scotiabank.

Sterling advanced against many currencies including a softer Canadian Dollar during the opening week of the year in price action that enabled GBP/CAD to take another run at a notable resistance barrier near 1.7250 on the charts.

GBP/CAD previously tried but failed to overcome that level on two occasions as its festive holiday rally faded during the final days of December, although technical analysis from Scotiabank suggests Sterling could be more successful in its latest attempt.

“GBPCAD gains faded through late Dec but the month overall delivered some solid technical positives for the pound which suggest the broader technical outlook is turning more positive,” says Juan Manuel Herrera, a strategist at Scotiabank.

“A clear rejection of the early Dec low on the weekly chart turned into a bullish monthly signal (outside range). This should reinforce support on (relatively) minor dips in the short run and help propel the GBP towards the 1.75/1.76 range (at least—as this represents to the top of the broader sideways range in place last year),” Herrera and colleagues wrote in a Tuesday briefing.

Above: GBP/CAD shown at daily intervals with Fibonacci retracements of late September decline indicating possible areas of technical resistance to any recovery.

Reference rates at publication:

GBP to CAD spot: 1.7247High street bank rates (indicative): 1.6643 - 1.6764Payment specialist rates (indicative: 1.7092 - 1.7161Find out about specialist rates and service, hereSet up an exchange rate alert, hereGBP/CAD was on course for a third consecutive gain on Wednesday as the main Sterling exchange rate GBP/USD climbed to its highest since early November over a period in which Canada’s Loonie ceded ground to the U.S. Dollar.

GBP/CAD tends to closely reflects the relative performances of USD/CAD and the main Sterling exchange rate GBP/USD, and often sees its largest moves when both USD/CAD and GBP/USD travel in the same directions.

“The largest provinces in Canada are locking down, but other jurisdictions aren’t,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets, noting that some Canadian provinces have responded to the Omicron variant coronavirus more stringently than the government in England.

“Front-end spreads are the primary arbiter for price action going forward, and we continue to see risks towards further US underperformance which keeps the focus for USD/CAD to the upside over the medium-term. Expect the near-term range to be 1.26-1.29,” Rai also said.

The Canadian Dollar softened through late December and in early January and it could be the reintroduction of coronavirus-related restrictions on business activities in parts of the country that explains the underperformance.

Above: Local authority areas subject to lockdown restrictions. Source: Canadian government.

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“Ontario's renewed COVID restrictions may be dampening the CAD to some degree but pandemic news has been largely washing over markets recently and we doubt this is a major driver of the CAD’s performance at the moment,” says Shaun Osborne, chief FX strategist at Scotiabank.

“We remain constructive on the CAD outlook—given the prospect of fairly rapid BoC tightening this year. But we do expect seasonal trends to keep the CAD trading more defensively in the early part of the new year,” Osborne also said.

Canada’s most populous province Ontario was the latest to announce a partial form of ‘lockdown’ this week although others including Quebec took similar steps as far back as December 19 in response to the spread of the Omicron variant of coronavirus.

The announced measures include the closure of bars, casinos, theatres and other performance venues as well as restrictions on the opening hours of hospitality premises like restaurants, all of which are automatic headwinds for the economic recovery.

They could potentially vindicate the Bank of Canada (BoC) for sticking with its earlier guidance in December that suggested interest rates are unlikely to rise before the second quarter of 2022.

Parts of the market have been wagering in recent months that there was some chance of an interest rate rise coming in either January or March but interruptions to the Canadian economic recovery would potentially make such outcomes even less likely.

Above: USD/CAD shown at daily intervals with the GBP/CAD rate.