- GBP/CAD supported at 1.7470

- Scope for 1.77 ahead.

- Vaccine story, valuation aid GBP ahead of BoE decision.

- Stock market falls pose risk to CAD ahead of job data.

- Labour market in focus for CAD after Nov GDP surprise.

Image © Pound Sterling Live

GBP/CAD spot rate at time of writing: 1.7547Bank transfer rate (indicative guide): 1.6933-1.7056FX specialist providers (indicative guide): 1.7284-1.7423More information on FX specialist rates hereThe Pound-to-Canadian Dollar exchange rate overcame multiple technical impediments on the charts last week as Sterling took the lead among major currencies for 2021, which has opened the door to a higher range that could ultimately see GBP/CAD testing 1.77 for the first time since March 2020 in the coming days.

Sterling pulled ahead a resurgent U.S. Dollar as well as over the now-flagging commodity Dollars of New Zealand, Australia and Canada last week after being swept up on a wave of optimism over the pace of the UK's vaccine rollout while also benefiting against the Loonie and others from widespread losses in stock and commodity markets.

GBP/CAD cleared major Fibonacci retracements on both the daily and weekly charts before eventually trading close to 1.7650, its highest since August. However, the Pound benefits immediately this week from the prospect of further weakness in global markets, which is a positive influence on GBP/CAD.

"CAD retains one of the strongest, positive correlations with the S&P 500 among the majors, in fact so heighted stock market volatility is a negative risk for the CAD in general," says Shaun Osborne, chief FX strategist at Scotiabank.

Canada's Dollar was an underperformer by the close on Friday when U.S. stock markets ended their worst week since October, although it could be susceptible to further losses if risk appetite remains fleeting over the coming days.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with Fibonacci retracements of 2020 fall.

GBP/CAD would rise back above 1.76 and potentially as far 1.77 if further global market weakness takes USD/CAD back to last week's highs while the main Sterling exchange rate GBP/USD remains near the top of its recent range.

However, and in the event that global markets stabilise early this week, a recovery rally by Canadian Dollar could weigh briefly on GBP/CAD even amid further resilience from GBP/USD. The Pound-to-Canadian Dollar rate would fall back to around 1.75 or just below if USD/CAD makes it back to 1.27 this week.

"USDCAD risk reversals suggest a further deterioration in CAD sentiment, regardless of the GDP data. We look for USD losses to extend towards 1.27 next week but we think better USD buying is likely to develop on USD softness to – or a little below – the 1.27 level," Osborne says.

In the absence of widespread market volatility the Scotiabank team looks for the Loonie to derive support from a nascent improvement in Canada's economic fortune relative to the U.S., which was evidenced last week by the latest GDP data from both sides of the border.

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"The economy did a better job than we anticipated shrugging off what was already a building second wave of Covid, partly because governments hesitated in ordering even partial lockdowns, but also because more of the economy had been rejigged to operate more effectively in the face of such measures," says Avery Shenfeld, chief economist at CIBC Capital Markets.

Statistics Canada indicated Friday the economy was growing at almost an 8% annualised rate in the final quarter, way ahead of expectations at the Bank of Canada and almost twice the 4% annualised recorded over in the U.S.

GDP figures could prompt heightened interest in jobs reports due this Friday at 13:30, which could weigh on USD/CAD if they show Canada remaining an outperformer, although CIBC Capital Markets forecasts suggest the outcome may be rather neutral for the Loonie.

"We still think that USDCAD is a sell on the 1.28 handle and that it will find its way back down to a 1.25 handle over the next 3M or so. That would especially be the case if the BoC were to begin (or even communicate a near beginning) of QE taper in April, ahead of the Fed taking a similar step," says Greg Anderson, global head of FX strategy at BMO Capital Markets.

Above: USD/CAD shown at 4-hour intervals alongside GBP/USD (orange).

CIBC looks for net job losses of -50k for a January month that many Canadians spent in another form of 'lockdown,' with an unemployment rate of 8.6%, eyeing nil change over in the U.S. against a consensus that envisages a meagre gain of 55k to follow on from December's -140k contraction in employment.

"While measures of the stringency of rules suggest that this year’s versions are similar to those of the first wave, the good news is that the effect on overall employment likely won’t be as severe as it was in early 2020. Many industries have adapted since then, as have individuals who have shifted purchasing patterns. That will work to ease some of the pain from the latest of shutdowns," CIBC's Shenfeld says.

Meanwhile, the Pound has remained on its front foot thanks to a comparatively faster coronavirus vaccination campaign than is being seen elsewhere, which has scope to remain an ongoing source of support for the currency. The highlight of the week ahead for Sterling is the latest Bank of England (BoE) decision on Thursday at 12:00, alongside which it's expected to reveal the outcome of a review into negative interest rates as a policy tool.

Governor Bailey indicated earlier in January that the BoE isn't keen on the idea of negative rates, prompting a rally in Sterling at the time so any suggestion this week that their use might be likely after all could pull the rug out from under the currency. However, and on the other hand, a further sidelining or otherwise shelving of the idea would remove one large but lingering uncertainty from Sterling's path and may act as a catalyst for further gains.

MUFG said this week this "should open the door to more GBP upside and lift cable towards the 1.4000-level," which would mean upside to 1.79 for GBP/CAD if at the same time USD/CAD was back around 1.27.

Above: GBP/CAD at weekly intervals with 55, 200-week averages & Fibonacci retracements of post-referendum fall.