Pound-to-Canadian Dollar Rate Poised to Fall Show Technicals, Brexit Votes to Prompt Volatility: The Week Ahead Forecast
- GBP/CAD hits top of channel and reverses lower
- Signs of exhaustion following period of gains
- Brexit votes to be main mover of GBP
- Oil prices could be main factor for CAD
The Pound-to-Canadian Dollar rate is trading at 1.7452 at the start of the new week after falling 0.5% in the previous week, the 2019 advance now stands at a mere 0.4% heading into what could be a pivotal week for this pair.
Sterling weakness was mainly as a result of increasing frustration at a lack of a breakthrough in negotiations between the UK and the EU, suggesting there will be no majority in Parliament for Theresa May’s Brexit deal when it comes to the House of Commons on Tuesday.
From a technical perspective, the GBP/CAD outlook is now marginally bearish after the pair rose up and touched the top of a long-term sideways range, between roughly 1.75 and 1.68, and reversed lower.
The pair peaked at 1.7723, formed a candlestick reversal pattern called a ‘tweezer top’ and started to decline. It has now fallen to the 1.74s and although this is not enough to signal a reversal yet a clear break below 1.7400 would probably provide confirmation of more downside to a target at 1.7250 just above the level of the 50-day moving average (MA).
Downside momentum is quite bearish and reinforces the bearish slant of the chart. The way the pair overshot the upper channel line and peaked above the top of the channel is a possible sign of exhaustion of the uptrend which could indicate a more concerted downside outlook for the pair.
The weekly chart also looks bearish after the exchange rate rose and touched the 200-week MA before reversing and falling back down to end in the red. The position and shape of the red candle, hanging as it does at the top of the channel seems to also suggests more downside is probably on the cards.
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The Canadian Dollar: What to Watch this Week
The Canadian Dollar weakened at the start of last week after the Bank of Canada announced a new stance on monetary policy in which it was no longer planning to raise higher interest rates because of a more subdued growth outlook.
The currency was further pressured by political scandal after Justin Trudeau was accused of putting the former Justice minister under undue pressure to be lenient on a state-owned construction company SNC Lavalin, which was charged with corruption to preserve jobs at the company.
The latest polls suggest Trudeau has taken a big hit to his popularity over the scandal.
In the week ahead the Canadian Dollar is likely to trade with a more measured tone as there are no major releases on the economic calendar.
One potential driver to watch is the value of one of Canada's main foreign exchange earner: oil.
The global oil market is about to enter a period of “supply deficit” according to research from Barclays, which should keep prices supported.
This is likely to last until the end of 2019 when the market returns to equilibrium. That being the case, the price of oil in general as well as Canadian oil, is likely to remain elevated.
Another factor likely to keep oil prices elevated is that China’s oil demand has remained stronger than was expected.
The Canadian oil index was rising quite strongly at the start of 2019 and supporting CAD in the process but it looks like it has topped out a bit at $45 over the last few weeks and may even be heading into deeper bearish territory if it breaks below the key $42 level.
A turn in fortunes for this key Canadian export would therefore likely help underpin the currency.
The Pound this Week: It's Crunch-time
The main event for Sterling in the coming week is Parliament’s meaningful vote on Brexit on Tuesday.
With no further concessions on the Irish backstop likely from the EU, and talks being described as being close to breaking down, Theresa May is now unlikely to present the changes required to win and the most probable scenario is that Parliament then moves to vote on whether or not to exit the union without a deal, on Wednesday.
Assuming it does not vote for this outcome - parliamentary arithmetic suggests this is highly unlikely - the next most probable outcome is that Parliament votes on Thursday to decide to request a delay of Article 50 and the whole Brexit process from the EU.
That there will be a delay is currently the consensus expectation. How this will affect Sterling is open to interpretation.
“If lawmakers choose to delay Brexit, a modest rise is attainable for the Pound, while a surprise backing of May’s deal could send the Pound surging above $1.35. But In the unlikely event that a no-deal wins support, sterling could crash below $1.27,” says Raffi Boyadijian, an economist at broker XM.com.
The Brexit deal faces a heavy defeat in parliament on Tuesday because she has so far secured no major changes from the European Union, the leaders of two major eurosceptic factions in parliament said on Sunday.
Nigel Dodds, the deputy leader of the Democratic Unionist Party (DUP) which props up May’s minority government, and Steve Baker, a leading figure in the large eurosceptic faction of her Conservative party, warned “the political situation is grim”.
“An unchanged withdrawal agreement will be defeated firmly by a sizeable proportion of Conservatives and the DUP if it is again presented to the Commons,” they wrote in the Sunday Telegraph.
In further, developments a Sunday Times report says May’s team have been warned by senior Brexiteers that she would get her deal passed only if she offered to resign by June so a new prime minister could lead the second phase of negotiations.
"We think Sterling faces a more difficult road," says James Rossiter, a foreign exchange strategist with TD Securities. "A lot of good news is already in the price and that investors may have gotten a little ahead of themselves in hoping for further positive developments. With the UK's data and event calendar relatively light until the 12th, we think Sterling may start to feel the effects of gravity once again."
The other main release is UK GDP which is forecast to show a 0.2% rise in January after a -0.4% fall in December when it is released at 9.30 GMT on Tuesday.
GDP is forecast to have risen 1.2% from a year ago, up from 1.0% previously. A higher-than-expected rise would support the Pound and vice versa for a lower-than-forecast result.
The trade balance in January is released at the same time as GDP and is forecast to show a -12.2bn deficit compared to -12.1bn previously.
Also released at the same time is manufacturing production and this is forecast to show a 0.0% rise in January month-on-month compared to the -0.7% previously.
Industrial production in January is released at the same time and estimated to have fallen by an even steeper -1.4% from -0.9% previously.
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