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British pound is stronger going into 2021 with a trade deal.

GBPCAD forex Analysis

The big macro themes are that the UK over the next year or so gets stronger as it navigates its way into new global trade deals and finds a new partnership arrangement with the EU, having been held down by the prospect of a “No Deal”, disorderly Brexit. The other side of this forex trade is that the Oil complex suffered greatly due to oversupply and restrictions of movement due to the coronavirus pandemic and subsequent lockdowns.

Going into 2021, it is foreseeable that there will be a double dip recession in the UK. This is solely down to the Tier 4 lock downs being imposed by the governments at national level and previously local level. The economy won’t be able to get back off its knees until the small to medium size businesses can get back to work.

The vaccines are a welcome development, and the projections are that by the end of Spring the most vulnerable of the populous will have had at least the first course of treatments, with the only worry being that to get herd immunity we may need to raise the level of total vaccinations for the population from 65% to 80% due to the new mutations of COVID that are both more infectious and potentially virulent.

Economists are currently predicting that the lull in economic activity at the beginning of 2021 will lead to a shallower downturn than in 2020 and that there is significant scope for a strong rebound. A signal for the rebound will be when the household savings ratio returns to past decades norms of 8%, as currently we’re holding onto our money due to the economic uncertainty and the ratio is elevated to 16.9%. For the economy to really bounce confidence needs to return and the money needs to be put back into the system.

The Canadian dollar is closely tied to the Oil complex and looking at the Brent and WTI charts they are clearly in lockstep with each other, and both at weekly, monthly and yearly resistance levels. For the Oil prices to elevate, there needs to be a supply shock or more demand. News out of OPEC+ suggests that from January 1st 2021, the supply will increase and if the news around lockdowns is correct the major economies are not going to have much demand for Oil at the beginning of the new year. This to me is a clear suggestion that the Canadian dollar will start the year weaker.

Looking at the GBPCAD weekly chart, today’s prices are within a 1500 pip range which is part of a multiyear range from the Brexit referendum decision. The last two weeks have been very bullish as the Brexit transition period comes towards the end of the imposed deadline.

Based on the fundamental ideas outlined above, I expect the GBPCAD to move further away from its 200-week period moving average and at least test the highs of the larger range at levels last tested in March 2018. If we could get a break above the 1.8200 and form a support level where once was significant resistance, the range of 1.9300 to 1.9400 would be my next target. Ultimately, a much strong pound could see us trading back up to 2.000 which would be a measured move of our current larger range and also the previous pre-Brexit referendum highs.

On the daily chart, GBPCAD has found support this last week at the 200 sma, the MACD is bullish suggesting the momentum is increasing and we’re likely to breakout of the wedge chart pattern which is defined by higher swing lows and lower swing highs. Traders could trade the breakout of a swing high, but it would be wiser to wait for a pull back to confirm the support after resistance is breached.

The bullish GBPCAD idea is wrong should for some reason the expected trade deal not come to fruition and the UK ends up leaving the transition period with a ‘No Deal” exit. Also, the Canadian dollar could increase on declining stocks of oil and higher demand should the lock downs be very short, and the economic activities pick up sooner than expected thus avoiding the current recessionary conditions. This would potentially lead to a continuation of the sideways range, with the pound struggling to breach the resistance highs.

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