PoundSterlingLIVE – The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions
to Canadian Dollar exchange rate () stormed higher last week and flipped the technical setup positive. However, the coming days require a pullback, with the Bank of Canada decision in focus.
This is because the pace of last week’s advance is currently overstretched. To be sure, the Relative Strength Index (RSI) is not yet at overbought levels, but GBP/CAD is running way ahead of its nine-day moving average (1.7873).
The exchange rate likes to revert towards the nine-day MA following major divergences and a retracement towards this technical indicator is possible in the short term.
There is no set target for such a move given the nine-day MA is rising and is, therefore, a moving target. In simple terms, we look for a shallow pullback.
Above: GBP/CAD at daily intervals.
Although there is scope for a cooling, GBP/CAD starts Monday on the front foot once more, hinting that further gains could be in store.
Last week, the pair broke above the 50-day moving average in a signal of building momentum, which is confirmed by an RSI that is distinctly positive and pointing higher at 62.
The near-term target (next couple of weeks) is that horizontal line in the chart at 1.8150, which forms the twin peaks of the 2024 highs.
There seems to be no shortage of selling interest at this level, suggesting to us there will be ample interest in selling at this level again.
So, an attempt at this graphical resistance is highly likely, but a definitive break into a more concerted uptrend is less assured.
The Canadian Dollar was one of the outperformers in the October-November period, a spell that coincided with a rise in the U.S. Dollar.
But the Dollar rally has faded and December is seeing a pullback that is dragging CAD down alongside.
Above: Bank of America (NYSE:) says unit labour costs remain an inflationary risk, which will prompt Bank of Canada to cut by 25bp on Wednesday.
Add to this ongoing signs of weakness in the Canadian economy, and CAD underperformance exceeds USD underperformance.
GBP/CAD rose by 0.82% on Friday, making for the biggest single daily advance in a year, after wage and unemployment data for November opened the door to a 50 basis point rate cut at the Bank of Canada on Wednesday.
“Elevated population growth and still-high participation rates caused the unemployment rate to jump to 6.8 percent, blowing past consensus estimates for a rise to 6.6 percent,” says Karl Schamotta, an analyst at Corpay.
“On balance, we now think the Bank of Canada will move more aggressively, cutting by 50 basis points and telegraphing a faster return to neutral in 2025,” he adds.
Should the Bank proceed with a 50bp move, CAD can come under further pressure.
However, a 50bp cut is not fully priced by the market, opening the door to a 25bp move that would prompt CAD to snap higher (GBP/CAD lower).
“We expect the BoC to cut its policy rate target by 25bp on Dec. 11, to leave it at 3.50%. The BoC will remain data-dependent,” says Carlos Capistran, an economist at Bank of America.
He acknowledges there is a risk for a 50bp cut, but he thinks a 25bp cut is appropriate because there are still upside pressures on inflation, as seen in unit labour costs.
“Following the November employment data, rates market pricing for a 50bp BoC rate cut decision increased to 80%. could see some knee-jerk weakness in a 25bp BoC rate cut scenario but is unlikely to fall below 1.40,” says Capistran’s colleague, Howard Du.
“We continue to have 1.40 as our 2024 year-end forecast for USDCAD (Liquid Insight: 18 November 2024). Tariff risk premium should keep the pair supported, but a 25bp BoC rate cut decision limits near-term bearish momentum for CAD,” he adds.
An original version of this article can be viewed at Pound Sterling Live
