The GBP/CAD exchange rate has been stable since the beginning of 2024, trading around 1.70-1.71. With a strong correlation with several commodities, such as oil and gold, traders can trade the currency pair by analyzing the forex market and commodities market.
Let’s discuss the top ways to trade GBP/CAD.
What is GBP/CAD?
The GBP/CAD currency pair represents the relative value of the British Pound (GBP) against the Canadian Dollar (CAD) in the forex. It shows how many Canadian Dollars are needed to purchase one British Pound.
History of GBP/CAD
GBP/CAD has not witnessed a volatile exchange rate in the last five years. The currency pair's lowest was around 1.52 in August 2022, whereas the highest was 1.77 in February 2021. In the last six months, the rate is up by 3.54%.
When is the best time to trade GBP/CAD?
Overlap of London and New York sessions
The most active period for trading GBP/CAD occurs during the overlap of the London and New York trading sessions, between 8:00 AM and 12:00 PM EST (12:00 PM to 4:00 PM GMT). During this time, trading volume and volatility tend to be higher, providing more opportunities for traders.
Pre-London session
The hour or so leading up to the official start of the London session can also be active for GBP/CAD trading. Traders may position themselves ahead of key economic releases or news events scheduled for the European session, leading to increased volatility.
Post-New York session
After the New York session closes, there can still be trading activity in other markets, such as Sydney and Tokyo. While liquidity may decrease during this time, there can still be opportunities for traders, particularly if there are developments in the UK or Canadian markets after the close of New York trading.
How to trade GBP/CAD: top strategies
Oil price correlation strategy
The GBP/CAD pair often correlates with oil prices due to Canada's significant oil exports and the UK's dependence on oil imports. Traders employing this strategy monitor oil price movements and their impact on the Canadian Dollar (CAD).
When oil prices rise, CAD may strengthen, leading to a potential decline in GBP/CAD. Conversely, falling oil prices could weaken CAD, possibly causing GBP/CAD to rise. For example, if oil prices experience a sharp decline, indicating potential weakness in the Canadian Dollar (CAD), traders might consider entering a long position in GBP/CAD and vice versa.
Interest rate divergence strategy
This strategy involves monitoring interest rate differentials between the Bank of England (BoE) and the Bank of Canada (BoC). When there's a significant divergence in interest rates, traders may anticipate currency movements in the England Pound to CAD pair.
For instance, if the BoE raises interest rates while the BoC keeps rates unchanged, the GBP may strengthen against the CAD, leading to a potential uptrend in GBP/CAD. For example, traders may exit their positions if interest rate differentials narrow or if there are signs of central bank policy shifts that could impact GBP/CAD and vice versa.
Seasonal patterns strategy
Traders may observe seasonal trends or patterns in the GBP/CAD pair, influenced by tourism, trade flows, and economic cycles. For example, the GBP may exhibit strength against the CAD during certain times of the year, such as the holiday season or peak tourist periods.
Traders using this strategy analyze historical data to identify recurring seasonal patterns and adjust their trading accordingly. For example, suppose historical data indicates that the GBP tends to strengthen against the CAD during certain months. In that case, traders may enter long positions in anticipation of this seasonal trend and vice versa.
Commodity currency spread strategy
This strategy involves trading the GBP/CAD pair in relation to other commodity currencies, such as the Australian Dollar (AUD) or the New Zealand Dollar (NZD). Traders may take advantage of correlations or divergences between GBP/CAD and other commodity currency pairs, leveraging spreads to capitalize on price movements.
For instance, if GBP/CAD shows a strong positive correlation with AUD/CAD and AUD/CAD experiences a significant rally, traders may consider entering a long position in GBP/CAD and vice versa.
Hedging
Traders may use hedging techniques to mitigate risk when trading the English Pound to Canadian Dollar. For instance, if a trader has exposure to GBP/CAD but anticipates adverse price movements, they could use options contracts or forward contracts to hedge their positions and protect against potential losses. For example, traders may exit hedging positions when they close their primary positions or when the need for hedging diminishes and vice versa.
Sentiment analysis
Sentiment analysis involves assessing market sentiment and positioning to gauge potential movements in the English Pounds to CAD pair. Traders monitor factors such as investor sentiment, positioning data, and news sentiment to identify trends or shifts in market sentiment that could influence GBP/CAD prices. For example, if sentiment indicators suggest a bullish bias towards GBP/CAD, traders may enter long positions and vice versa.
Geopolitical risk arbitrage strategy
This strategy involves capitalizing on geopolitical events and their impact on the GBP/CAD pair. Traders assess geopolitical risks, such as Brexit developments or geopolitical tensions affecting oil prices, and anticipate how these events could affect currency movements.
By staying informed about geopolitical developments, traders aim to identify opportunities and manage risk effectively.
Event-driven strategy
Traders using an event-driven strategy focus on specific events or announcements that could impact the GBP/CAD pair, such as economic releases, central bank meetings, or geopolitical developments.
By analyzing the potential impact of these events on currency movements, traders aim to capitalize on short-term price fluctuations and volatility. For example, traders may exit their positions once the anticipated impact of the event has materialized or if there are signs of a reversal in the GBP/CAD pair and vice versa.
Factors affecting GBP/CAD
Economic interdependence
Economic interdependence is the close relationship between the economies of two countries. When countries are economically interdependent, their economic activities, such as trade and investment, are closely connected.
The economies of the UK and Canada are closely intertwined through trade, investment, and financial ties. Trade agreements, such as the Canada-United Kingdom Trade Continuity Agreement (TCA), govern bilateral trade relations, influencing the flow of goods and services between the two countries. Strong economic performance in one country can increase demand for the other's currency, affecting the Pound to Canadian Dollar exchange rate.
Monetary policy coordination
Monetary policy coordination refers to the alignment or divergence of monetary policies between two countries.
Central banks are crucial in shaping currency values through monetary policy decisions. The Bank of England (BoE) and the Bank of Canada (BoC) set interest rates, implement quantitative easing measures, and provide forward guidance to manage inflation and support economic growth. Coordinated monetary policies can lead to stable exchange rates, while divergent policies may cause volatility in GBP/CAD.
Cross-border remittances
Remittances, or money transfers from individuals working abroad to their home countries, contribute to currency demand and supply. The UK and Canada have significant immigrant populations, leading to substantial cross-border remittance flows. Remittances boost demand for the recipient country's currency (GBP) while increasing the supply of foreign currency (CAD), affecting exchange rates and economic stability, especially during holidays or economic downturns.
Time of day and session overlaps
Forex markets operate 24 hours a day, five days a week, with distinct trading sessions overlapping at certain times. The London and New York session overlap, occurring from 8:00 AM to 12:00 PM EST, is known for increased trading activity and liquidity. During this period, traders may witness heightened volatility in GBP/CAD due to higher participation from market participants.
GBP/CAD tends to strengthen during the London-New York session overlap when there is positive economic news from either the UK or Canada, increased investor confidence in the British economy, or heightened demand for GBP due to factors like interest rate hikes by the Bank of England and vice versa.
The gold market
Gold prices are a barometer of market sentiment and a hedge against inflation and economic uncertainty. Canada is a major gold producer, while the UK is a global financial center with significant gold trading activity. Changes in gold prices can impact investor sentiment and risk appetite, indirectly influencing currency movements, including Pound to CAD.
The currency pair is likely to appreciate when gold prices rise, as Canada's significant gold production and the UK's active gold trading contribute to their respective economies and vice versa. Higher gold prices can boost Canada's export revenue and investor confidence. In contrast, in the UK, increased gold trading activity may stimulate economic growth and strengthen the Pound against the Canadian Dollar.
The electrical machine industry
The electrical machinery and equipment industry contributes to bilateral trade flows between the UK and Canada. Trade in electrical goods affects the balance of payments and currency demand. Changes in industry output, technological advancements, or trade policies can influence the competitiveness of the GBP and CAD, impacting the British Pound to Canadian Dollar exchange rate.
Pound to Canadian Dollar exchange rate depreciates when the electrical machinery and equipment industry experiences growth in Canada, leading to increased exports to the UK. It strengthens the Canadian Dollar as demand for CAD rises due to higher export revenues and vice versa.
Risks associated with trading GBP/CAD
- Black swan events: Unforeseen and unpredictable events, often referred to as "black swan" events, can have a significant impact on currency markets, including GBP/CAD. These events, such as natural disasters, terrorist attacks, or unexpected policy changes, can lead to extreme market volatility and disrupt normal trading patterns.
- Geopolitical events: Geopolitical events such as Brexit developments, trade tensions, or political instability in the UK or Canada can impact the Pounds to Canadian Dollar pair. Uncertainty surrounding geopolitical events can lead to increased market volatility and sudden shifts in currency valuations.
- Late North American session: Towards the end of the New York trading session, liquidity in GBP/CAD may decline as traders in North America wind down their activities. During this period, liquidity risk may increase, leading to wider bid-ask spreads and potential challenges in executing trades at optimal prices.
- Oil price clash: Due to the heavy reliance of the Canadian economy on oil price exports, if oil prices experience volatility, it can lead to uncertainty and unpredictability in the CAD's value, which in turn affects the GBP to Canadian Dollar exchange rate. Traders may face challenges in forecasting and managing their positions effectively due to the impact of oil price movements on the CAD, making it a risk factor to consider when trading GBP/CAD.
- Interest rate differentials: The interest rate differentials between the Bank of England (BoE) and the Bank of Canada (BoC) can pose a risk for GBP/CAD traders. When unexpected changes or shifts in interest rate expectations by either central bank, it can lead to sudden and sharp movements in the GBP/CAD exchange rate.
- Changes in commodity prices: Changes in commodity prices, particularly those important for Canada's economy, like gold, lumber, and natural gas, can affect the Canadian Dollar (CAD) due to its reliance on commodity exports. Consequently, fluctuations in commodity prices can impact the GBP CAD exchange rate as traders adjust their positions based on changes in the CAD's strength or weakness relative to the British Pound (GBP).
Uncovering opportunities and risks for traders with GBP/CAD trading
Trading GBP/CAD offers opportunities for gain through its sensitivity to economic indicators, geopolitical events, and commodity prices. The pair's volatility allows traders to capitalize on short-term fluctuations, while its correlation with oil and other commodities allows for strategic positioning based on commodity market trends.
However, inherent risks exist, such as Brexit uncertainties and shifts in interest rate differentials. Managing these risks through thorough analysis, effective risk management strategies, and staying informed about market developments is crucial for GBP/CAD trading.
Disclaimer:
- The examples in this article are only intended to enhance a consumer's understanding of the strategy described above and should not be taken as Blueberry. providing personal advice.
- Forecasts and predictions about future performance are inherently uncertain and speculative in nature. While every effort has been made to provide accurate and reliable information, there is no guarantee that the events or outcomes discussed will occur as forecasted. Past performance is not indicative of future results.
