Pound buyers' optimism is on the decline

27 December 2022 274
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The GBPCAD pair continues to correct down from the 9-month high reached in mid-December. Given the strength of the upward momentum, which helped to fix a local peak at 1.6845, even the next two weeks of correction have not yet led to the oversold RSI indicator. The macroeconomic forecasts for the next year are also in favor of the pound declining.


The U.K. was the first developed country to actually recognize the current state of the economy as a recession. Many problems, including a huge budget deficit, double-digit inflation and a falling housing market, have led to such a bleak result. The Bank of England is clearly expected to stop the tightening cycle of monetary policy at the next meetings.


According to the U.S. Commodity Futures Trading Commission, investment funds and asset managers are holding a net short position on the pound, expecting it to decline. Almost all analysts surveyed by Bloomberg expect the pound to fall, not only against the U.S. dollar, but also against the euro, yen, etc.


The Canadian dollar is also able to strengthen against the British currency. The Canadian economy, unlike the U.K. economy, is still growing, albeit more slowly than before. Oil, Canada's main export commodity, is growing in value again, and this growth may accelerate after the reduction of "black gold" production in Russia and an increase in demand from China after the lifting of the COVID restrictions. Finally, the Bank of Canada (BoC) will hold its first meeting of 2023 a week ahead of the Bank of England, which means the BoC may be the first to hike rates.


Even the first Fibonacci retracement level (23.6%, at 1.62) has not yet been reached, despite the last 2 weeks of decline in GBPCAD. The 1.62 level is also the highs of May, which adds to its significance. The RSI is dropping lower and lower, but there is still enough room. Thus, the GBPCAD may continue its decline in the coming days.


The following trade strategies may be suggested:


Sell GBPCAD at its current price. Take profit 1 – 1.62. Stop loss – 1.644.


Also, traders, at their discretion, can use the Trailing stop instead of the fixed Stop loss.


This content is for informational purposes only and is not intended to be investing advice.

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