- CAD threatens GBP rally but tests range low Vs USD.

- Stabilising risk appetite, oil price recovery, lifting CAD.

- Market now eyes U.S. payrolls report and CA jobs numbers.

- After GBP falters amid concerns over Brexit and economy.

- Outlook hinged on if key GBP/USD, USD/CAD levels hold.

- GBP/CAD needs to hold 1.71 to keep six-month uptrend alive.

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The Pound-to-Canadian Dollar rate bounced off the week's lows Friday but earlier losses have left a key support level exposed, creating uncertainty about whether its six-month uptrend can endure beyond the weekend

Canada’s Dollar has been rejuvenated this week by a recovery of risk appetite that’s lifted oil prices off recent lows and lent support to a Loonie that had been bruised in the coronavirus-inspired global sell-off in the prior week. Meanwhile, the Pound has been wounded by rhetoric that’s stoked concerns about the possible deficiencies of an eventual future relationship agreement with the EU.

This has weighed on the Pound-to-Loonie rate, bringing it close to technical support level around 1.71 that guards the six-month uptrend just as Canada’s January jobs report is about to be released to the market.

The jobs data, as well as general risk appetite in the wider market, will be key to whether the uptrend endures for much longer.

“The CAD is a modest out-performer, alongside the AUD, by default because it has not moved against the USD through the overnight session. Commodity FX should benefit from improved risk appetite around trade and the Wuhan virus, we feel, but the market will likely reserve judgement on the CAD until tomorrow’s jobs data at least,” says Sean Osborne, chief FX strategist at Scotiabank.

Above: Pound-to-Canadian Dollar rate shown at daily intervals.

"The focus for CAD has pivoted from the global to the local story. The relative growth story has started to sputter, putting a BoC cut back on the table," says Richard Kelly, global head of strategy at TD Securities. "Lack of any easing, either fiscal or monetary, in 2020 is likely to drive material downside risks for core inflation in the coming two years. It is appropriate, therefore, for the BoC to start to lean into this weakness."

Markets will scrutinise January’s jobs figures at 13:30 Friday for clues about the Canada's New Year economic momentum, with a view to assessing the implications for actual growth relative to Bank of Canada (BoC) forecasts. Those numbers can be telling of the outlook for household confidence and spending as well as business investment, all of which are being closely monitored by rate setters for signs the economy is in need of assistance.

“The BoC opened the door to rate cuts at the January meeting, although we think it will take more disappointment to get there,” Kelly says. “Further weakness will test the BoC's resolve, as would another flare-up in global trade tensions. The front-end is pricing in 1.5 cuts by year-end. We see this as fair.”

TD is in-line with the market in looking for slower jobs growth in January and for the jobless rate to tick higher to 5.7%, which sets a low bar for an upside surprise that might then be enough to lift the Loonie into the weekend. Such an outcome would leave the trajectory of the Pound-to-Canadian Dollar rate hinged partly on the signal coming from the U.S. jobs report.

Above: Pound-to-Dollar rate (GBP/USD) shown at daily intervals.

“GBPUSD is at risk of a push lower as the harsh reality of the post-Brexit landscape becomes clear and the UK is left with little negotiation leverage against the EU,” warns John Hardy, head of FX strategy at Saxo Bank. "The market is poorly positioned for a new, drawn out phase of negotiations."

The Pound-Canadian Dollar rate always closely matches the sum of GBP/USD over CAD/USD so can be characterised as a bit of a race between Sterling and the Loonie, against the U.S. greenback. This means the outcome of Sterling’s ongoing battle to hold above support around 1.2960 against the U.S. Dollar will be a key influence on the trajectory of the GBP/CAD rate over the coming days. But so too will the result of the greenback’s attempt to push USD/CAD above the 1.33 top of its own six-month range.

Saxo Bank's Breakout Monitor has identified Sterling as a good candidate for short-selling while Hardy advocated on Thursday that clients bet on a fall from 1.2960 to 1.2710 against the U.S. Dollar, although others not only see the important GBP/USD support level remaining intact over the coming days, but are also warning that the USD/CAD rate is likely to climb above 1.33.

"The short-term trading range is flat between support at 1.3265 and resistance at 1.3305,” Scotiabank's Osborne says. "We think the range will hold into tomorrow but a break should yield a move of 40-50 ticks in either direction. We favour limited USD upside from here spot bumping up against long-term trend resistance (off the early 2016 high) at 1.3335."

Above: USD/CAD rate shown at daily intervals.

Any upside surprise in Friday’s Canadian jobs numbers might help the Loonie to push the greenback into a retreat from the 1.33 level unless it is offset by a strong non-farm payrolls report from the U.S., which might act as an opposing driver for that particular exchange rate.

However, any payrolls boost to the U.S. Dollar would risk heaping more pressure on the GBP/USD rate and if that happens at the same time the USD/CAD rate is backing away from the 1.33 threshold then it could exacerbate the downward correction in the Pound-to-Canadian Dollar rate.

Any further downward leg in the GBP/CAD rate might lead to a test its own technical support level that is key to keeping the six-month-long uptrend intact, although Scotiabank expects tips GBP/USD to hold its support and USD/CAD to briefly explore the ground above 1.33.

Both U.S. and Canadian jobs figures are also due out at 13:30 on Friday while there’s no major data expected from the UK.

“The minor stall seen over the past three days appears to reflect a minor (bullish) consolidation (GBP-bullish above 1.7250). We think the GBP should push higher (towards 1.77/1.78 again) while the cross holds above 1.71 from here," says Scotiabank's Juan Manuel Herra in a note to clients last week.

Above: Pound-to-Canadian Dollar rate shown at weekly intervals.