Pound-to-Canadian-Dollar-Rate in the Week Ahead: Birth of a New Uptrend?

Image © Bank of Canada

- GBP/CAD stages turnaround and threatens to break higher.

- Short-term outlook bullish as series of indicators flag upside. 

- Brexit headlines drive GBP as oil prices dominate the CAD. 

The Pound-to-Canadian-Dollar rate staged a strong rebound to end the week back up above 1.6960 and could continue to rise during the days ahead. 

GBP/CAD saw a poor start to last week which saw the market fall back to 1.66 but an improved outlook for Brexit negotiations saw the market turnaround despite the Canadian unit gaining from the adoption of the USMCA trade agreement - which replaces NAFTA. 

We see a strong chance the pair may now be entering a short-term uptrend that could endure over coming days. The four-hour chart is showing two sets of higher highs and higher lows, which is often a sign that a bullish trend has begun.

Above: GBP/CAD rate shown at 4-hour intervals.

The pair has broken above the 50-day moving average on a closing basis, which is another sign the trend could be changing, while the relative-strength-index indicator is also rising steeply in a way that favours a bullish move higher.

Above: GBP/CAD rate shown at daily intervals.

If the pair can break above the major trend-line it is currently butting up against, it is likely to rally even higher, to an eventual target around 1.7100. A breakout would probably be confirmed by a break above 1.7020.

The weekly chart shows how volatile last week was when the exchange rate formed a bullish engulfing candlestick. If this week also brings a price increase, it will strengthen the reversal signal presented by the candlestick.

Above: GBP/CAD rate shown at weekly intervals.

The weekly chart also shows how the market formed a very clear a-b-c-d pattern down from the March highs. Now that this long symmetrical zig-zag is complete there is an increased probability it will be followed by a period of upside for the exchange rate.

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The Canadian Dollar: What to Watch

The main data economic release for the Canadian Dollar in the week ahead will be housing market data.

The number of new housing starts in Canada, due for release at 13:15 London time Tuesday, is forecast to have risen from 201k in August to 205k in September. 

Building Permits for September are expected to show a 1.3% rise when the number is released at 13.30 on Wednesday. 

Meanwhile, the New House Price Index in August will be released Thursday at 13.30. The index rose 0.1% in August although here are no forecasts for this week's number.

Now that Canada has signed a new trade deal with Mexico and the U.S., fears of a protracted trade war that could result in higher tariffs have subsided and this has led to some fresh upside for the Canadian Dollar. Another major driver of the Canadian Dollar is the price of crude oil, which is the country's main export.

The price of oil has been rising recently on supply fears linked to U.S. sanctions against Iran. WTI crude closed last week trading at $74.29 per barrel. If it rises any higher this will help the Canadian Dollar to appreciate.

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The Pound: What to Watch this Week

All eyes now turn to a meeting of European leaders at a dinner on October 17 when they review the state of negotiations with the U.K. ahead of the October European Council summit commencing on October 18.

"In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal," European Council President Donald Tusk said at the Salzburg informal summit.

Expect market nerves to remain piqued over the next week as headlines, rumours, optimism and disappointment create an unstable environment for traders to navigate.

"Brexit remains the key driver for the GBP and uncertainty related to the outcome is likely to keep the GBP volatile," says Mikael Olai Milhøj, a foreign exchange strategist with Danske Bank.

The president of the European Commission, Jean-Claude Juncker, has meanwhile said on the weekend he is sure a Brexit agreement could be reached in November, if not sooner.

Jean-Claude Juncker told three Austrian newspapers that Brexit without a deal "would not be good for the UK, as it is for the rest of the union".

He added:

"I assume that we will reach agreement on the terms of the withdrawal agreement. We also need to agree on a political statement that accompanies this withdrawal agreement - we are not that far yet. I have reason to think that the rapprochement potential between both sides has increased in recent days, but it can not be foreseen whether we will finish in October. If not, we'll do it in November."

At the moment there appears to be a lot of support for a Canada +++ arrangement even from within Theresa May's Conservative party, so if the proposal is broadly well received, it could be a big moment for negotiations and a concomitant rise in GBP. Of course, the risk of a rejection is also quite high, and, therefore, a fall in GBP.

The question of the Irish border remains a sticking point but the UK has said it will propose a solution in the week ahead so there may be movement from news about that too.

On the data front, the main release is probably going to be GDP data, which is forecast to show a 0.1% rise in August, when it is released at 9.30 B.S.T on Wednesday. In July GDP rose 0.3%. A higher than expected result would help GBP.

"Things are looking rosier for the third quarter and there should be more evidence of this from the monthly GDP estimates due on Wednesday. UK GDP is expected to have expanded by 0.1% m/m in August, to produce an annual figure of 1.5%," says a preview from FX broker XM.com. "On a 3-month basis, growth is forecast at 0.6%, which would match July’s rate and point to growth of a similar amount for the third quarter."

Another major release for the Pound is likely to be the trade balance in August, which is expected to show a -10.9bn deficit when it is released at the same time on Wednesday.

Industrial and manufacturing production are also out at the same time and are both forecast to show a 0.1% in August compared to the previous month.

Finally, the Royal Institute of Chartered Surveyors (RICS) house price balance is out just after midnight on Thursday morning and the retails sales monitor for September is released by the Consortium of British Industry (CBI) just after midnight on Tuesday morning.

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