Image © Adobe Images
Pound Sterling has now recorded nine consecutive daily advances as it extends the recovery from early February; however, the advance looks set to falter in the coming days.
The Pound-to-Canadian Dollar (GBP/CAD) fell 2.7% in just seven days after the U.S. said it was delaying 25% import tariffs on Canadian goods to March 04 to allow Canada to enhance its border security measures to curb the flow of illicit drugs and undocumented migrants into the U.S.
CAD's relief rally was big but ultimately short-lived and GBP/CAD has been clawing back lost ground since February 11, confirming market participants still see heightened risks around the announcement.
HSBC strategists warned last week that the imposition of broad 25% tariffs on Canada, should negotiations fail, could lead to a sharp depreciation in the Canadian Dollar that could eventually see GBP/CAD break to fresh multi-year highs.
"This currency faces the most immediate deadline among the many swirling in that U.S. trade policy fog," says HSBC strategist Daragh Maher.
Despite the risks to CAD, we note that only about 60% of the decline in GBP/CAD has been recovered, and we don't expect a full recovery to the 1.8164 high as a further delay in the tariff decision is a possibility.
This would lead to a modest strengthening of the CAD against GBP and will provide enough caution to frustrate any attempt back to the February 03 high at 1.8164.
So in effect, the exchange rate is finding some middle ground heading into a two-way risk scenario.
Stepping away from tariff talk, any outright Pound Sterling strength could deliver an extension of the GBP/CAD recovery. However, there is limited news on the UK calendar to look forward to this week, which should limit upside enthusiasm.
This leaves us forecasting further upside, albeit limited, to 1.8050, which marks the 78.6% Fibonacci retracement of the early February selloff.