GBP/CAD: stage set for a potential rally

At the start of last week we highlighted a GBP cross, namely the GBP/JPY, and suggested that a sharp move was on the way as it tested a key support area. As it turned out, the GBP/JPY did in fact rally strongly off the 175.50 support level as we had envisaged and at the time of this writing it is trading a good 400 pips higher around 179.50. This time another GBP cross is catching our attention: the GBP/CAD.

Although the Canadian dollar has found some much-needed support in recent weeks, due, above all, to the rallying oil prices, it is not out of the woods just yet. The USD/CAD pair’s pullback can also be explained away by the US dollar’s weakness, but against the GBP the CAD’s rally may not last long. After all, the UK economy appears to be in a better shape at the moment, even though the interest rate differential favours the CAD over GBP (BOE’s 0.5% rate < BOC’s 0.75%). As Canada’s largest export is oil, the full cost of the crude price slump may not have been fully filtered through in the economy just yet. What’s more, oil prices are unlikely to rise near their 2014 levels any time soon. So even if oil prices bounce back a little, Canadian exporters will still be receiving significantly less for the same volume of oil sold. This makes us wonder whether the GBP/CAD’s recent pullback will prove to be just a correction inside a much larger upward swing.

Indeed, the GBP/CAD is showing some signs of support around a key technical area. As can be seen on the chart, it has pulled back to its 61.8% Fibonacci retracement level of the most recent upswing, at 1.8305. It has also momentarily traded below its 200-day moving average at 1.8320. But today it is trying to break higher and is currently testing the broken support at 1.8380/90. If this resistance level is taken out then it may stage a sharp rally as the sellers rush for the exits and fresh buyers jump in. The first important technical hurdle to watch beyond 1.8380/90 is the support-turned-resistance level around 1.8510. Thereafter, the Fibonacci retracement levels will be the next bullish targets to watch, with the 38.2% coming at 1.8685.

Meanwhile if the GBP/CAD fails to take out the aforementioned resistance level then that may precede further weakness over the coming days. A particularly bearish outcome would be if it breaks below last week’s low at 1.8150. If seen, a move down to the 78.6% Fibonacci retracement level of the last upswing, at 1.7965, may then get under way.

In case you haven’t released, Fibonacci is widely used in our analyses. If you don’t fully understand it or want to enhance your knowledge further on this famous subject, then you may want to read our freshly-written guide.