Pound-to-Canadian Dollar Rate Week Ahead Forecast: Overarching Bearish Trend Tipped to Continue, GDP and BoC Survey in Focus
Image © Bank of Canada
- GBP/CAD showing mixed signals but bears in control
- More downside expected in medium and long-term
- Canadian Dollar to be impacted by Business Outlook Survey
The GBP/CAD exchange rate is trading at 1.68, virtually unchanged on where it was this time exactly one week ago and studies of the charts are showing a mixed outlook in the near-term, but given the overarching trend is bearish, the bias is in favour of more downside.
The 4 hour chart shows the pair found a floor at the June 20-21 lows and rebounded higher. It is a strong recovery but still too early to say whether it will extend.
The downtrend is by far the most dominant and given the old adage that ‘the trend is your friend’ we see a good chance that the pair could continue lower over the short-term.
An extension to the downside would be conditional, however, on a break below the 1.6675 lows. Such a break would open the way up to a move down to the next target at the 1.6600 key August 2018 lows.
Alternatively, there is also a chance the recovery could extend; and a break above the 1.6880 highs would provide confirmation of a continuation up to a target at 1.6960.
The 4-hour chart is used to determine the short-term outlook, which includes the coming week or subsequent 5 days.
The daily chart shows the pair in an established downtrend which we would normally expect to continue, however, there are signs which suggest the risk of a bullish recovery too, and this tempers our bearish forecast with a note of caution.
A continuation lower would be conditional on a break below the 1.6675 lows. Such a move would see the exchange rate move down to an initial target at 1.6600.
A further break below those key lows could see the pair go even lower, to the next target at 1.6365.
The bullish signs we see which have led us to temper our bearish forecast are as follows: the first is that the pair has now met the minimum bear target calculated from the initial break out of the rising channel. That expectation is calculated by extrapolating 61.8% of the height of the channel from the break and is 1.6725.
The second is that the RSI momentum indicator in the bottom panel has been forming a multiple bottom low which is suggestive of more upside for momentum, and therefore probably price.
The third is that the pair has formed a reversal pattern called a ‘tweezer bottom’ (circled) during the 20 and 21 of June on the daily chart. This is when the exchange rate touches a similar low on two consecutive periods.
The weekly chart - which is used to analyse the long-term trend over the next few months - is showing the possibility of a bearish continuation down to a potential downside target at 1.6000 in the long-term.
The pair may have formed an ABCD Gartley pattern since rolling over at the March highs. If so, the final C-D leg is probably currently unfolding and will lead to an extension down to an even lower downside target in the following months.
There is one bullish sign, however, in the form of a hammer reversal candlestick which formed last week, and if this is followed up by another bullish candle this week, it would provide a clearer signal of more upside on the horizon.
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The Canadian Dollar: What to Watch
The main domestic data release on the horizon for the Canadian Dollar is April GDP data; whilst on the macro front, the price of oil could also impact, since crude is Canada’s main export.
GDP growth is forecast to show a 1.5% and 0.2% rise on a yearly and monthly basis respectively, in April, when it is released at 13.30 on Friday, June 30. This compares to 1.3% and 0.5% in the previous month.
“A 0.2% headline print should provide some comfort to policymakers concerned over global headwinds, and keep Q2 GDP tracking well above the Bank of Canada’s 1.3% projection from April,” says TD Securities, a Toronto-based investment bank.
The release could impact on the outlook for the economy which is currently considered relatively positive compared to G10 peers. A higher-than-expected result would support CAD.
Inflation recently beat expectations at 2.4% in May, suggesting robust growth. This could even begin to increase the chances of a Bank of Canada (BoC) rate hike, which would be supportive for the Canadian Dollar.
Higher interest rates tend to support local currencies since they increase inflows of foreign capital drawn by the prospect of higher returns.
Friday’s Business Outlook Survey from the Bank of Canada is meanwhile tipped by Elsa Lignos of RBC Capital Markets to "probably the most influential indicator ahead of the BoC’s July 10th meeting and MPR."
The survey period oversaw the intensification of negative trade developments (early May to early June), though US steel and aluminium tariffs were dropped in the period notes Lignos.
Furthermore, negative sentiment has come through in the Markit manufacturing PMI, which fell to 49.1 in May (lowest since Dec-2015) and is consistent with a reading around -2 for the aggregate BOS indicator, from -0.6 last time.
Lignos notes capacity pressure indicators softened markedly in Q1 but may be supported by further easing of Alberta’s production curtailments in Q2. "However, at the same time, the output gap is estimated to have widened further leading into it (-0.75% in Q1). Labour market measures should hold up relatively well."
The tone of the survey should influence market expectations for future action at the BoC.
The fact the BoC is not expected to cut interest rates contrasts increasingly vividly with most other central banks which are either hinting at or in the process of cutting interest rates. This is likely to support the CAD.
Another major breakthrough for the Canadian economy and CAD has been the approval of the Trans Mountain oil pipeline, which should make Canadian crude more competitive and reduce bottlenecks.
Oil prices have reversed and started climbing as a result of Middle East tensions. WTI currently stands at $57.80 per barrel, rising over $5.00 from last week’s $52.00. The Canadian Crude Index is at $40.45.
Oil could continue to rise if tensions escalate in the Persian Gulf, which would impact positively on the Loonie.
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