For the last 3 weeks, the GBPCAD currency pair is in the steady downtrend. Are there prerequisites for a reversal or will the decline continue?
A set of favorable conditions have recently developed for the Canadian currency: high prices for exported goods (oil, gold, wheat), and an increase in the key rate by the Bank of Canada, and a relatively low exposure to geopolitical risks.
It is the opposite for the British pound:
1) high prices for raw materials provoke an acceleration of inflation. The February inflation assessment of 5.5% now does not seem to be close to the price growth peak: the maximum is expected at 8% (expectations were 7% a month ago).
2) inflation provokes a rates’ increase in the economy. And the Bank of England continues to increase the key rate: after the meeting on 17 March, it is 0.75%. But this time, the rate increase did not cause for optimism among market participants. What's the matter?
The point is in the way the decision was made upon the key interest rate and in the Bank of England comments.
If the meetings participants unanimously raised the rate before (and some participants insisted on a rapid increase), now 8 out of 9 participants voted for a minimum rate increase by 0.25%. The ninth participant even suggested leaving the rate at the same level of 0.5%.
It can be said that the officials’ determination of the British regulator to tighten monetary policy has clearly decreased. The risk of the economy within stagnation has increased and the authorities will have to find a balance between maintaining GDP growth and trying to curb rising inflation.
Judging by the GBPCAD dynamics, market participants vote that this balance is unlikely to be found. The last attempt at growth was stopped by a "bearish engulfing" and the downtrend continues so far.
As the price has not managed to move significantly away from the minimum of 1.65655, it may be advisable to wait for testing of the downtrend line or the level of 1.67. In this case, the strategy options will look as follows:
1) Selling GBPCAD when reaching the level of 1.663. Take profit is 1.6565. Stop loss is 1.67.
2) Selling GBPCAD when the level of 1.67 is reached. Take profit is 1.6565. Stop loss is 1.675.
Also, traders can freely use Trailing stop instead of a fixed Stop loss when the price moves down.