GBP/CAD: Sterling pounded by a dovish BoE

The pound has relinquished its earlier sharp gains and has turned lower across the board. The Bank of England’s somewhat downbeat assessment of the UK economy and its outlook on inflation has caused the market to think that a rate hike is not even in the radar for most of the Monetary Policy Committee (MPC) members, except Ian McCafferty of course. The BoE also sounded worried about the impact of the stronger pound on inflation as it mentioned sterling in its policy statement 17 times, no less. Also unnerving bullish traders was the amount of time China was mentioned in the statement, suggesting the Bank is watching the developments in the world’s second largest economy closely. The overall dovish tone from the BoE points to further weakness for the pound in the days and weeks to come.

As my colleague Matt Weller has already highlighted, the GBPU/USD remains in danger of breaking down as it continues to hover around the neckline of a Head and Shoulders pattern. But the recent weakening of the US dollar is working against the GBP bears to some degree. Thus bearish speculators may be better off looking at a GBP cross instead like the GBP/CAD, which could fall sharply if our short-term bullish view in crude oil is correct (oil being Canada’s main commodity export).

The last time we looked at the GBP/CAD currency pair was on Thursday of last week when we highlighted the possibility of a breakdown as it was testing key support around 2.0030 (see “Volatile day for crude and Canadian dollar,” for more). We said that if the bulls held their ground here then a rally towards the resistance trend of the bearish channel could be a possibility, while a closing break below this area “whether today or in one of the upcoming sessions could lead to a drop all the way to the bottom of the channel.”

As can be seen from the updated chart, below, the GBP/CAD did in fact break to the downside as oil prices rallied. After that breakdown, the cross fell for a time below our noted initial target around 1.9900 – where its 100-day moving average meets the 38.2% Fibonacci retracement level of the last major upswing – and reached a low of almost 1.9800, before staging a kick-back rally. It is now testing that broken support at 2.0030 and if this level turns into resistance now then price may head lower once more. The 161.8% Fibonacci extension level of the counter-trend move we saw last month comes in at 1.9700 which needs to be watched closely now. Below this level, there are not much further short-term supports seen until the 50% retracement at 1.9550/60, an area which also corresponds with the previous resistance and possibly the lower support trend of the bearish channel (depending on the speed at which price falls, should we get there at all).

However if the GBP/CAD manages to bounce back either later today or at some point in the near future and breaks back above the pivotal 2.0300 level then it may go on to at least test the upper resistance trend of the channel, around 2.0175-2.0230, before deciding on its next move. And if and when the GBP/CAD finally breaks out of the channel, this could mark the resumption point of the long-term rising trend.