- GBP/CAD below 1.74 as CAD makes comeback with oil

- GBP/CAD charts point to consolidation with upside risks

- USD/CAD seen trending higher in new BofA forecasts

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GBP/CAD reference rates at publication:Spot: 1.7335Bank transfer rates (indicative guide): 1.6728-1.6850Money transfer specialist rates (indicative): 1.7179-1.7214More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Canadian Dollar rate has struggled for momentum thus far in the new week but technical analysis from Scotiabank has flagged upside risks for both GBP/CAD and USD/CAD, while new forecasts from BofA Global Research suggest the Loonie’s nascent comeback could be short-lived.

Canada’s Dollar was making a comeback on Tuesday and pushing the GBP/CAD exchange rate lower in the process, with price action coming alongside gains of more than two percent for major oil benchmarks like Brent and West Texas Intermediate crude.

The Pound-to-Canadian Dollar exchange rate slipped back beneath 1.74 as a result to trade as low as 1.7350 though its trend on the daily and weekly charts is still suggestive of lingering upside risks, according to Scotiabank.

“Intraday trend strength signals are flat but the daily and weekly oscillators are leaning GBP-bullish which keeps broader risks tilted to the upside, we feel, despite what looks to be a very neutral short-term technical situation,” says Juan Manuel Herrera, a strategist at Scotiabank.

“Short-term price patterns suggest upside risks still in development for the USD, with USDCAD having carved out a bullish (inverse) Head & Shoulders pattern on the 6-hour chart," Herrera writes in a Monday note.

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

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Herrera and the Scotiabank team noted this week that just like for GBP/CAD, the charts have recently painted a picture of indecision for USD/CAD when viewed at short-term intervals but that they favour an eventual resumption of June’s uptrend in what would be supportive outcome for GBP/CAD.

“The USD is tracking a little firmer still against its major currency peers, with gains supported by yesterday’s Fed comments reinforcing the view that the Fed officials are actively considering tapering and that an announcement on it is likely before year-end,” says Scotiabank’s chief FX strategist Shaun Osborne in a Tuesday research briefing.

“The GBP and CAD are holding up somewhat better on the session (and we note that relative central bank policy risks may be more supportive for both generally) while the KRW, ZAR and JPY are lagging,” Osborne adds.

The Pound-to-Canadian Dollar rate has often shadowed USD/CAD in recent weeks and so might be expected to draw support from any eventual resumption higher by the latter exchange rate which, alongside the main Sterling pair GBP/USD, is direct and primary determinant of GBP/CAD.

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With the main Sterling exchange rate GBP/USD buoyant around 1.3850 on Tuesday, Pound-to-Canadian Dollar declines were driven almost entirely by USD/CAD and would peter out ahead of the 1.73 level if USD/CAD leaves the nearby 1.25 handle intact.

Any USD/CAD decline below 1.25 would be a bearish development for GBP/CAD this week, although such an outcome would potentially prove to be short-lived if the latest forecasts from BofA Global Research are anything to go by.

“The Canadian dollar has strongly outperformed in 2021 due to a virtuous cycle of global economic recovery, strong commodity price appreciation, a hawkish central bank, buoyant risk appetite and supportive speculative flows. We see reversal of the dynamic playing out into year-end, driven by moderation in terms of trade,” says Ben Randol, a strategist at BofA Global Research.

Randol and the BofA Global Research team upgraded their projections for USD/CAD this week and now look for the exchange rate to rise back to 1.27 by the end of September and for it to close the 2021 year up at 1.30, citing the prospect of a renewed and further moderation of commodity prices.

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

“USDCAD has rallied to our 1.25 forecast for 3Q, but we no longer expect a retest of 1.22. We upwardly-revise our forecast path to 1.27 in 3Q and 1.30 in 4Q (Exhibit 1). We expect stabilization around the 1.30 level at the turn of the year and for USDCAD to trade back lower toward the mid-1.20s as 1H 2022 unfolds. Risks to the forecast are two-way and depend chiefly on the evolution of commodity prices and monetary policy,” Randol says.

Randol and colleagues do however, also forecast a volatile Pound-to-Canadian Dollar rate performance in the months ahead, with declines to 1.7145 anticipated for the end of September ahead of a rebound back this week’s starting level of 1.7420 as the curtain closes on 2021.

These projections are owing to the anticipation of a strengthening U.S. Dollar connected with Federal Reserve monetary policy, which is expected to also push the main Sterling exchange rate GBP/USD lower over the coming months, 1.35 in September and 1.34 by year-end.

Though if there’s one thing that could wrongfoot forecasts of a weaker Canadian Dollar it’s exactly the kinds of oil price gains that were seen Tuesday.

“Such commodity price fluctuations matter for CAD because Canada's terms of trade (the price of exports relative to the price of imports) has fluctuated wildly over the last year and a half (Exhibit 5). After plunging more than 10% last year, Canada's terms of trade recovered quickly and are now more than 10% higher (i.e. more favorable) than pre-pandemic. Relative to the US, Canada's terms of trade shift has been slightly less pronounced," Randol says.

Above: BofA Global Research forecast summary for USD/CAD.