GBP/CAD Pair On Course to Test 1.73 in the Week Ahead

January 2, 2022
GBP/CAD Pair On Course to Test 1.73 in the Week Ahead January 2, 2022 Lennox Hamilton

Since the beginning of December, the GBP/CAD conversion rate has regained roughly 75% of its fall recorded in the past few weeks. However, the Loonie’s under-performance against other riskier currencies, until the end of this year, could pave way for the GBP/CAD to try and reach the 1.73 level.

In the week ended last Tuesday, sterling has gained ground against most of its key rivals, and in the pathway has overcome a series of technical resistance barriers in its rebound against the Canadian Dollar. This has created the right set of circumstances for an endeavored encounter to levels unseen since the final leg of September.

During last month, the GBP/CAD rose by over 3.5%, regaining its previous high of 1.72 and opening a way towards 1.73 as we entered the last week of 2021. Shaun Osborne, chief foreign-exchange strategist at Scotiabank, wrote in an article published last Monday that “advancement a continual basis (i.e., last traded price for the day at a bare minimum)—would be a huge positives for the pound and indicate the likelihood for the cross Forex pair to move further towards the upper band of the wider spectrum in place in 2022.”

According to Osborne and his companions, the GBP/CAD pair should continuously close above 1.7125 to fuel another rally toward 1.7225/50 and even 1.7375 range in the next fortnight. The analysts peg the support at 1.7085/95 levels. The GBP/CAD gains in recent times would have been highly restricted if the latest economic news pertaining to the UK did not suggest a mild impact of omicron strain of coronavirus, compared with earlier variants, on the public health scenario. Studies conducted in England, South Africa and Scotland discovered that the threat of hospitalization was in the range of 15% to 80% below the delta strain of coronavirus, implying a mild negative impact on economic activities than previous versions of the infections.

This prompted investors to renew bets that the Bank of England (BoE) would raise interest rates up to four times and as much as 1.25% in 2022, boosting Sterling conversion rates in the way, albeit GBP/December CAD’s surge is partly due to the loonie’s underperformance. The GBP/CAD bounce began on 9th of December, after the Bank of Canada policy monetary meeting reiterated that benchmark interest rates will probably remain unaltered until 2Q22, pouring cold water on a portion of market participant’s expectations that anticipated the cash rate to climb to 0.5% in January.

“Our forecast is for four BoC rate increases and three Fed raises in 2022, with the BoC moving initially in April.” We anticipate that USD/CAD pair will slightly decline in H1 2022, although broad USD resilience will restrict the loonie’s advances, on a similar note as seen in the second-half of 2021.Keeping that in perspective, we don’t expect USD/CAD paid to fall considerably below 1.25 in the first quarter,” opined Greg Anderson, worldwide chief of currency strategy at BMO Capital Markets.

For a major portion of December, following the decision, the Loonie has been on a decline, ceding territory to all top rivals except the Euro, Swedish Krona (past week) and the yen,. Interestingly, during the aforesaid time frame, several Canadian regions brought back business prohibitions owing to coronavirus outbreaks. Newly enforced restrictions may be one among the reasons for the Canadian Dollar to avoid responding to favorable economic news in the last few days and continue with its downward trend versus most currencies. The only exception to the scenario was with the US Dollar, which trended downwards against all its peers, barring the Japanese Yen.

“Even now, Canada’s GDP is slightly higher than the Bank of Canada’s 4% forecast mentioned in October’s monetary policy report,” pointed out Andrew Grantham, an economist at CIBC Capital Markets. Last Friday’s official data indicated that Canada’s economy has rebounded quicker in the final quarter than expected by the policymakers at the BoC, albeit not adequately quicker to prompt the Bank of Canada to start hiking the benchmark rates faster than its guidance issued earlier.

The Official data suggested last Friday that Canada’s economy recovered faster this quarter than Bank of Canada policymakers anticipated in their latest forecasts, although not fast enough to mean the BoC would be likely to begin lifting its cash rate any faster than already guided for. The USD/CAD course and momentum are major factors that will determine the GBP/CAD exchange rate i.e., whether the pound will break above 1.73 or below 1.70.

“The CAD finished almost where it began in 2021 i.e., at 1.2725. A strong economy, as well as the likelihood of the Bank of Canada beginning its normalizing process at the beginning of this year implies that the loonie may strengthen against its peers the following year,” says Shaun Osborne, chief FX strategist at Scotia bank. “USD/CAD softening below 1.2760 in the days ahead could trigger intense sell off in the initial part of January, but a recovery from mid-1.27s would threaten a US dollar rebound back to 1.28-1.29 level,” opined Osborne and his team.

With the pivotal Sterling currency rate GBP/USD climbing above 1.34 in the final week of December, the GBP/CAD pair is expected to change hands above 1.73 in case the USD/CAD tries to rebound over 1.29 for any significant news in the days ahead. Nevertheless, any additional decline of the USD/CAD pair would per se limit the GBP/CAD pair rebound, since GBP/CAD usually closely mirrors the comparative performances of the USD/CAD and GBP/USD pair.

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