GBP/CAD attempting recovery but upside limitedCould struggle to sustain advance beyond 1.6150BoE speech, UK’s PMIs & CA retail sales in focus

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate has lifted tepidly from close to three-year lows and has been aided by a supportive turn in UK government bond yields, although it could struggle to advance much beyond the 1.6150 level this week due to the ongoing resilience of the Loonie.

Pound Sterling edged higher against the Canadian Dollar through much of last week following the release of first quarter employment data as well as inflation and retail sales figures for April, each of which helped to set in train or further a supportive increase in UK government bond yields.

“The higher growth and tightening labour market conditions will keep pressure on the BoE to keep raising rates in the coming months. The scale of the initial move higher for the GBP was surprising though, perhaps reflecting that the market had become too heavily short and overly pessimistic on the near-term outlook for the UK economy,” says Lee Hardman, a currency analyst at MUFG.

While pay growth was concentrated in the white collar and public sector parts of the workforce that tend to earn bonuses, last week’s data suggested that UK wages pay packets are growing strongly and that household spending continues apace even with inflation having topped 9% last month.

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

The market may have interpreted the recent data to mean there’s a risk of the Bank of England (BoE) revising its inflation forecasts higher and continuing to lift Bank Rate during the months ahead, which would explain the supportive turn higher in the spread - or gap - between UK and Canadian bond yields.

The Pound to Canadian Dollar rate followed the UK-Canada yield spread higher last week as Sterling climbed from close to the round number of 1.5800, and near to its lowest level since August 2019, to end the week above 1.60. (Set your FX rate alert here).

However, it would likely need further strength in Pound in addition to a softening of the recently outperforming Loonie to extend its recovery beyond a nearby technical resistance barrier located just above 1.6150 on the charts.

“The GBP looks heavily oversold technically (and historically very “cheap” in our opinion) so we cannot ignore the support that is evident on the daily chart,” says Jaun Manuel Herrera, a strategist at Scotiabank.

“A break above 1.6090—effectively a double bottom trigger after the repeated tests of 1.5790— is the bare minimum we look for to signal a modestly firmer GBP profile at least may be developing,” Herrera and colleagues said in a review of GBP/CAD’s charts last week.

Above: GBP/USD shown alongside CAD/USD.

Sterling could benefit further and as soon as this Monday, with possible implications for GBP/CAD, if comments from BoE Governor Andrew Bailey support the idea that the bank could have little choice but to continue lifting interest rates in the months ahead.

He’s set to participate in a panel discussion titled "Monetary policy, policy interaction and inflation in a post-pandemic world with severe geopolitical tensions" at the Oesterreichische [Austrian] National Bank Annual Economic Conference around 17:15 on Monday.

That comes ahead of Tuesday’s IHS Markit PMI surveys and is the highlight of the UK calendar for the week ahead.

However, Wednesday’s release of Canadian retail sales figures for March and the accompanying estimate for April could also have influence on GBP/CAD and are expected to cast the local economy in a robust light.

“In Canada, a holiday-shortened trading week has only the retail figures in terms of major data releases. A strong March seems to have followed on the heels of a soft February, ending a robust quarter for the economy overall,” says Avery Shenfeld, chief economist at CIBC Capital Markets.