Bullish divergence on GBP/CAD: Has the pound bottomed out?

6 Jun 2022

In recent sessions, a technical bullish divergence has emerged on the GBPCAD pair, with prices reaching fresh lows at 1.575 while the momentum oscillator (14-day RSI) gaining pace, indicating that bears may have lost a bit of steam.

As of this writing, the GBPCAD exchange rate is down around 8% year-to-date and 9.5% from its February highs.

Since February 22, GBPCAD has been trading in a descending channel pattern, aided by the surge in OIL_CRUDE prices following Russia's invasion of Ukraine, which has served as a tailwind for the oil-linked Canadian dollar.

From a macro perspective, inflation in both countries hasn't peaked yet. The annual inflation rate in the United Kingdom GBIRYY jumped from 7% in March to 9% in April, the highest level since 1982.
Annual inflation in Canada CAIRYY accelerated from 6.7% in March to 6.8% in April 2022, the highest since January 1991.
The Bank of England hiked its Bank rate GBINTR to 1% in May, the fourth straight rise, but also signalled that the UK economy is expected to weaken in the second half of the year due to a decline in real household income.

The Bank of Canada raised interest rates CAINTR by 50 basis points to 1.5% last week, the third straight increase, signalling that it will raise rates further at its upcoming meeting to combat growing inflation, while the labour market continues to show signs of resilience.

However, the market is currently expecting a more aggressive monetary policy in Canada than in the UK, as seen by the yield differential between a 2-year UK gilt (GB02Y) and a Canada's Government Bond of the same maturity (CA02Y), which fell from near-break-even levels in March to -1.2% at the start of June, mirroring the GBP/CAD's trend.

The next Bank of England meeting is scheduled on June 16, with the market expecting another 50 basis point raise. Hawkish headlines might support the pound in the coming days. Meanwhile, the British pound awaits the outcome of Prime Minister Boris Johnson's vote of confidence, which will take place tonight at 6 p.m. in London, despite the fact that the rise in political instability has had little influence on the pound today.