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GBP/CAD plunges as oil rallies

The GBP/CAD may not be on most traders’ radars but it has dropped significantly in today’s session. Not only has the pound been among the weakest of the performers today but the Canadian dollar has recovered strongly too, thanks mainly to the rallying prices of crude oil (which is Canada’s largest export category). This double whammy has caused the GBP/CAD to take a battering. On its way down, the GBP/CAD has fallen back below the psychologically-important 1.90 handle which was taken out just last week. At the time of this writing, the GBP/CAD looks set to extend its losses further.  That said, it is not clear at this stage whether the rally in oil will last long and as such the risks remain for the Canadian dollar to resume its downward trend at some point down the line. We will also have the key UK services PMI data on Wednesday and this could help to support sterling. The currency pair may therefore resume its upward trajectory soon.

However, the key support at 1.8610/65 is still some distance away. Thus, the GBP/CAD bulls would either have to wait patiently until price reaches this area or alternatively look for opportunities at higher levels i.e. when price forms a bullish signal – for example, a particular daily candlestick pattern. Until/unless that is seen, the path of least resistance is now to the downside. As mentioned, the key support is around 1.8610/65; the upper end of this range corresponds with the high from last year while the lower end is the 38.2% Fibonacci level of the upswing from the 2014 low. While the GBP/CAD holds above this area on a daily closing basis, the longer term trend would remain bullish.  Shorter term speculators may also want to watch price action closely around the psychological 1.9000 handle. If the GBP/CAD manages to break back above this level and hold there then a rally towards the 2009 peak at 1.9295, and potentially beyond, could get under way.

Meanwhile the 50-day SMA has crossed above the 200 to create a so-called “golden Crossover.” This particular crossover sometimes precedes major rallies. It is thought that when the moving averages are in this particular order, some hedge funds and other large speculators would not sell, but look for buying opportunities. However it is important to remember that the moving averages are lagging indicators and they merely give indications about the longer term direction. Also, it could be argued that the GBP/CAD is currently overbought and that it may have to revert back to its mean around the moving averages, before making its next major move.

Figure 1:

Source: FOREX.com


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