Bullish GBP/CAD on CAD Correlation To Oil & GBP Strengthening
Point to Establish Long Exposure: At Market ( 1.6460)
Target 1:1.6627 (Jan. Intraday High)
Target 2:1.5837 July 2016 Correct High / Start of Wedge Lower
Invalidation Level:1.6206 (February Intraday Low)
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Fundamental & Technical Focus:
The Bank of England did not rock the boat on Thursday, but they did show the first split in the decision to raise rates since the post-Brexit BoE meeting. The decent came from Kristen Forbes; aknownhawk is departing from the BoE. This slightly hawkish outcome did see the market dump GBP short trades, which has been a theme lately despite Article 50 expecting to be triggered later this month, and institutions picked up leveraged GBP buying, which tends to be the earliest source of a trend shift. Another note from the BoE announcement was regarding the recent overshoot in inflation and pick up in wages that stated, “"The projected overshoot entirely reflects the expected effects of the drop in sterling. Pay growth has remained subdued, while measures of inflation expectations remain at levels broadly consistent with the achievement of the inflation target."
From a fundamental perspective, there is not a lot to be excited about on the GBP long-side, even though inflation is rising thanks to the relatively weak GBP, which led to the split decision to keep rates at 0.5% on Thursday morning. However, the technical picture looks to show stability across the board in sterling and makes the stable and potentially oversold-due-for-a-bounce sterling a likely counterpart to the weak Canadian Dollar, whose correlation to Oil is near the highest this year. The pickup in correlation is not coming at a good time for CAD Bulls as Oil has recently broken below the 200-DMA, and is having a hard time finding the needed bids to get back above.
Favorable Correlation Could Help GBP/USD Long Trade:
This combination leads up to consider GBP/CAD, an unpopular cross with a favorable S/W relationship. The chart below shows what looks to be stabilization on the downside as GBP bears lose their tenacity alongside a Bullish RSI(5) divergence on the Daily Chart.
In addition to the RSI(5) Bullish divergence, you can see that price has recently broken above Trendline resistance as well as recently found support from the 55-DMA that was resistance on the way down over the last year.
You’re not likely to see many articles on GBP/CAD, but keep a watch on a potential breakout that could take the price to the intraday high in January of 1.6627 or the November closing high of 1.7027. A breakdown below the February intraday low of 1.62067 would be proofenough that the trade should be sacrificed in search of one for a better expected risk: reward relationship.
Created by Tyler Yell, CMT
Tyler Yell, CMT
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.