Will GBP/CAD Drop to 1.80?

Will GBP/CAD Drop to 1.80?

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Fundamentals

Over the past few weeks, GBP/CAD has fallen approximately 400 pips from its high of 1.8650. This move was driven by the combination of sterling weakness and loonie strength. The British pound was driven lower by back-to-back disappointments in PMIs. In contrast, the Canadian dollar found a bottom in late March and extended its gains on Friday after stronger employment. Given the drop in the manufacturing PMI index, this week’s industrial production and the visible trade balance reports could surprise to the downside adding pressure on the currency pair. At the same, the Canadian dollar ended Monday’s trade at its highs versus the greenback and could extend its gains as the week progresses.

Technicals

Taking a look at the daily chart of GBP/CAD, 1.82 is clearly an important support level for the pair. It tried unsuccessfully to close below this price in mid February and tested it again last week. Friday’s low of 1.8167 is now the key support level. If GBP/CAD breaks below this level, the sell-off can extend as far as 1.7990. GBP/CAD needs to close above 1.83 to shake off the downside momentum and to position for a stronger move higher.

GBP/CAD – Positioning for 1.80 Break

GBP/CAD – Positioning for 1.80 Break

Chart Of The Day

Fundamentals

GBP/CAD has been consolidating for the past week and prime for a breakout. Friday’s better than expected employment report drove the Canadian dollar higher against all of the major currencies. The recent improvement in Canadian data (IVEY PMI and employment) should lead to more profit taking on short CAD positions in the coming week, which we believe will be negative for GBP/CAD. However the outlook for the currency pair hinges primarily on the Bank of England’s Quarterly Inflation Report because there is very little on the Canadian economic calendar this coming week. Aside from providing their latest economic forecasts, the Monetary Policy Committee has oftentimes used the Quarterly Inflation Report to telegraph major changes in policy. They will need to update their forward guidance this quarter because the unemployment rate has fallen quickly and could either choose to abandon their unemployment rate threshold or lower it. We think tying monetary policy to the jobless rate was a big mistake for U.K. and they should abandon this rule completely and move to something more qualitative to manage the market’s expectations. This option would create less volatility for their financial markets and the currency than a change in the level of the threshold. However if they choose to do so, it will most likely be negative for GBP/CAD because it reflects the BoE intention to maintain easy monetary policy for a longer period of time.

Technicals

GBP/CAD tested but failed to break below 1.80 for the past 4 trading days. This level was also an important area of resistance in mid January. Given the fundamental outlook, we think there is a chance this support will break at which point the next stop will be 1.78. On the upside, if GBP/CAD breaks above 1.82, the currency pair could extend to 1.84.