- GBP/CAD techs flag 1.7080 as fault-line for outlook

- Weekly close above needed to avert a range trade

- Capital Economics forecasts 1.7080 finish to 2021

Image © Bank of Canada

GBP/CAD reference rates at publication:Spot: 1.7053Bank transfers (indicative guide): 1.6456-1.6576Money transfer specialist rates (indicative): 1.6664-1.6934More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Canadian Dollar exchange rate outlook is clouded with uncertainty which could ensure a period of confinement within a narrow range unless Sterling is able to break above the nearby 1.7180 level this week, according to the latest reading of the charts from Scotiabank.

Sterling was higher against most major currencies on Wednesday with gains coming after UK GDP data surprised on the upside of expectations for the first-quarter, with the economic contraction seen under a third ‘lockdown’ having been shallower than consensus had looked for.

Britain’s economy contracted -1.5% last quarter, a touch less than the -1.6% envisaged by economists but in line with forecasts from the Bank of England (BoE), while GDP growth for the final quarter of 2020 was revised to a quarterly pace of +1.3% from an initial estimate of +1%.

The final quarter growth outcome was most notable because the economy spent one third of that period under a four week ‘lockdown,’ which was the UK’s second closure and one that lasted the duration of November.

Wednesday’s data casts the economy as more resilient to the effects of coronavirus containment measures than many had assumed while implying scope for a recovery that may also turn out to be stronger than is currently expected, although it’s done little for GBP/CAD.

“Technical cues from here will hinge on whether the GBP is able to push back above 1.7180 in the next day or so and whether the GBP rebound is sustained through the course of the week,” says Juan Manuel Herrera, a strategist at Scotiabank in a Tuesday research note.

Above: Pound-to-Canadian Dollar rate shown at daily intervals alongside USD/CAD.

The Pound-to-Canadian Dollar rate rose as far as 1.7148 on Tuesday before heading lower throughout the Wednesday session and in spite of better-than-expected economic figures from the UK.

“A firm run out through to the end of the week (at or above current levels would be ideal) should signal more GBP gains—potentially back towards the upper 1.74 area,” Herrera says.

The Pound-to-Canadian Dollar rate has struggled to reach the levels set out by Scotiabank, potentially indicating a more protracted spell near to current lows, although there’s a number of reasons for why any further declines in GBP/CAD might be as limited as the gains seen previously this week.

Scuppering GBP/CAD’s recovery were further gains for the Canadian Dollar which pushed USD/CAD to its lowest level since September 2017 and soon after the point when the Bank of Canada (BoC) began to lift its interest rate for the first time in almost a decade.

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“We think further appreciation in the Canadian dollar against the US dollar will be limited, as we expect the Bank of Canada will keep its policy rate unchanged longer than the market expects,” says Jonas Goltermann, a senior markets economist at Capital Economics.

BoC monetary policy has again been the driving force behind the Canadian Dollar this year after the bank suggested in its April policy statement that interest rate rises could be a possibility from around the middle of next year, triggering steep declines in GBP/CAD and USD/CAD.

Meanwhile, and over in Europe, the Bank of England announced large upgrades to its GDP forecasts just last week but otherwise did little that would encourage strength in Sterling exchange rates, which partly explains why GBP/CAD has struggled to sustain a recovery against the Loonie so far this week.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals alongside USD/CAD.

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However, with USD/CAD having briefly traded beneath 1.2050 this Wednesday and after having fallen -3.6% in the weeks since the BoC’s latest statement, many analysts doubt that the Canadian Dollar would advance much further in the short-term while some including Capital Economics say that it’s unlikely to advance much further at all in 2021.

“With a relatively large fiscal response and rapid vaccination progress in the UK, we think sterling will remain broadly stable against the dollar for the remainder of the year,” Goltermann says.

This, when combined with a similar outlook for the main Sterling exchange rate GBP/USD, implies a range-bound GBP/CAD exchange rate over the coming months as the latter always closely reflects the net performance of GBP/USD and USD/CAD.

Goltermann and the Capital Economics team look for USD/CAD to end the year around 1.22 and for GBP/USD to finish around 1.40, which implies a Pound-to-Canadian Dollar rate range-trade around 1.7080 over the coming months when the two aforementioned projections are take together.

“We think sterling has further upside against the euro: with the uncertainty around Brexit largely in the past and a stronger recovery from the crisis than the euro-zone, we think that UK long-term yields and asset markets will appear more favourable,” Goltermann writes in a recent forecast review.