The Pound-to-Canadian Dollar exchange rate recovered off three-month lows to rise above its breakeven point for 2021 on Monday. Still, with the Loonie poised to enjoy its own period of outperformance in the coming weeks, GBP/CAD upside may be limited over the coming days.
UK Pound and Canadian Dollar Forecast
Pound Sterling entered the new week on its front foot with gains over all major currencies on Monday including a 0.70% increase against the Canadian Dollar that lifted GBP/CAD back into the black for 2021 as well as above 1.74.
Meanwhile, the Loonie was softer against the U.S. Dollar alongside oil prices after progress was made in attempts to free a container ship that had caused disruption of shipping through the Suez Canal, but it outperformed European currencies with the exception of Sterling.
“Spreads and commodity prices broadly remain at CAD-supportive levels and should continue to cushion the CAD against deeper losses. Note that while Canada is lagging behind the UK and US, Canadian vaccination efforts are stepping up and are edging ahead of major EU nations,” says Shaun Osborne, chief FX strategist at Scotiabank. “We think USD losses below 1.2540 should trigger a little more technical weakness in the USD again.”
Thursday’s Organization of Petroleum Exporting Countries (OPEC+) meeting could underpin oil prices and further support the Canadian Dollar if recent volatility leads the cartel to eschew another increase in daily production, although the Loonie now enjoys multiple tailwinds.
These include the newfound appeal of North American economic outlooks and asset prices to international investors, which are a recipe for Canadian Dollar outperformance and explain why despite its explosive start, GBP/CAD may struggle to extend far beyond 1.74 this week.
“The dramatic divergence of European and US growth expectations is a legacy of poor management on this side of the Atlantic and will leave scars in market pricing,” says Kit Juckes, chief FX strategist at Societe Generale. “That gap needs to stop widening, at the very last, before it’s safe to sell the dollar again.”
With Monday’s oil price weakness aside the Canadian Dollar has scope to enjoy multiple tailwinds while Sterling runs the risk of being constrained or simply bogged down in a European vaccination mire that has left the old continent’s growth outlook trailing that of North America.
The net effect and implication of that could see the Pound-Canadian Dollar rate trading a relatively tight range between 1.72 and just north of 1.74 this week.
GBP/CAD has recently found strong support on weakness toward 1.72 but would struggle to sustain a move above 1.74 if as GBP/USD recovers toward 1.39 or even 1.40 over the coming days, USD/CAD declines back toward 1.25 ahead of a return to its current multi-year lows around 1.24.
The Loonie has more than just a commodity-tinged feather in its cap. However, now investors increasingly favor the North American regions as the year’s economic growth hotspot for the developed world. This is a potential boon for the Canadian currency even without the Bank of Canada (BoC) and its evolving monetary policy stance.