GBP/CAD – Gunning for Fresh 4 Year Highs?

GBP/CAD – Gunning for Fresh 4 Year Highs?

Fundamentals

GBP/CAD is in play over the next 24 hours because both countries have retail sales reports scheduled for release and there is a very good chance that one will be strong and the other weak, leading to a big directional move in the currency. Starting with the U.K., we have a number of reasons to believe that the retail sales report could surprise to the upside. Earlier this month, the British Retail Consortium reported the strongest increase in consumer demand in more than 2.5 years. The BRC retail sales monitor rose a whopping 3.9% in January, which compares to a 0.4% increase the previous month. Despite the rise in the unemployment rate, jobless claims dropped more than expected while average weekly earnings increased at a faster pace – both of which have positive implications for consumer demand. Confidence also improved significantly, rounding out our reasons for expecting an upside surprise in retail sales on Friday. In contrast, there’s a significant risk of a downside surprise in Canadian retail sales. Wholesale sales fell a whopping 1.4% in the month of December and unfortunately in our experience, this report has a strong correlation with the broader retail sales release. Economists are looking for a soft number and expect retail sales to fall by 0.4%. With job growth and manufacturing activity slowing in December, would not be surprised if retail sales dropped more than 0.4%, which would trigger a sharp sell-off in the CAD. Stronger spending in the U.K. and weaker spending in Canada could drive GBP/CAD to fresh 4-year highs.

Technicals

The recent rally in GBP/CAD has taken the currency pair within a whisker of its year to date high at 1.8560. This level capped gains in the pair for the past 2 month and if GBP/CAD finally musters the strength to break above this rate, there is some near term resistance at 1.8600 but beyond this level there is no major resistance until 1.90. If the currency pair fails at current levels, there is a very good chance it could drop back down to 1.82.

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