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Taking a long-term view, the British Pound has been one of the strongest major currencies so far this year while the Canadian Dollar has been one of the weakest. It might seem perverse, therefore, to go short GBP/CAD but in the near-term I’m expecting the CAD to correct higher against both the GBP and the USD.

The principal reason is that the Canadian dollar is a petro-currency, tending to move with the price of oil, which is a mainstay of the Canadian economy. And over the last few days the price of US crude has climbed from just over $44 per barrel a week ago to more than $48 per barrel currently.

That’s despite a report today from the Organization of the Petroleum Exporting Countries (OPEC) forecasting a sharp increase in output from US shale drillers, and is good news for the Canadian Dollar, which has stabilized in recent days against both the US Dollar and the British Pound after a long period of weakness.

Chart: GBP/CAD Daily Timeframe (Jan 1 – May 11, 2017)

Canadian Dollar to Correct Higher Against British Pound

Chart by IG

From a technical perspective, the pattern formed over the last few days on the chart above looks like a rounded top, a reversal pattern signaling that the upward trend in GBP/CAD could be ending and that we’ve reached a potential reversal point. The strength of the oil price despite the rather gloomy OPEC report suggests that it’s now bouncing higher, while the Pound could well succumb to General Election and Brexit jitters now that both a victory for the ruling Conservative Party and a “soft” Brexit seem to be fully priced in. Moreover, today’s weak UK data and the Bank of England’s quarterly Inflation Report suggesting that UK interest rates are unlikely to rise within the next two years suggest the Pound’s losses of the past few days could continue, at least for a while.

As the chart shows, there’s very little support for GBP/CAD until the area around 1.66, where it traded from mid-March to mid-April so that seems a reasonable medium-term target. On the other hand, a break above the 1.7849 high reached on May 5 would signal a resumption of the upward trend so that would be a sensible place at which to place a stop.

- Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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