GBP/CAD has been in a big downtrend since February this year and has lost 10% of its value but the GBP is now oversold and we expect a major rally to the upside. Our logic on the trade and a summary of the key support and resistance levels to look out for are below.
CAD Fudnamentals Market Sentiment Bullish
In terms of the bullish fundamentals that traders see which we think are factored in are below:
The Bank of Canada is expected to implement a 75bp hike at its 13th July meeting. This is widely discounted and the market views the economy is growing strongly, with record employment levels, and inflation at 7.7%, as reasons to raise rates while we expect a rate rise we think the Bank of Canada will sound cautious in their message due to the pain rate rises are having on mortgage holders and also the uncertainty of the economic outlook.
The bar is high for rate rises going into the end of the year and we expect the Bank of Canada to deliver a dovish hike.
A big bearish fundamental for the CAD is the slowing global economy and also the fall in commodities which we think will weigh on it going forward as fears of a global recession mount. The good news could be discounted for the CAD but what about the outlook for the GBP.
GBP Fundamentals Market Sentiment Bearish
In terms of the UK Boris Johnson will be replaced as Prime Minister and many forecasters say this political uncertainty is bearish for the GBP. We don’t agree and the new leader is unlikely to make big changes in policy. The resignation of Johnson is a big news story for the media but will have no big impact on the GBP.
In terms of energy, the December UK natural gas contract has hit an all-time high at 450 pence/therm this week, up from 250 only weeks ago and above the 400 level reached in March. Many forecasters are looking for another 50%+ increase in the price for October but this price hike is discounted.
The latest consumer confidence numbers hit an all-time low last month, this historically points to a recession. In addition, real household incomes are set to fall by around 2% this year. In terms of the Bank of England Bank, the market sees rates at 2.9% area, down from over 3.5%. The Bank of England is unlikely to be more dovish than market expectations judging by recent comments from committee members so again the bad news is discounted.
GBP to Correct its Oversold Condition
The question to ask is what more bad news is coming for the GBP and good news for the CAD?
We think the bearish fundamentals for the GBP are priced in but the market is not seeing any bad news coming for the CAD which obviously we think it will. In the short term, the GBP is oversold and likely to mount a major rally.
The key support and resistance levels to look out for are on the chart below.