Pound-to-Canadian Dollar Rate Week Ahead Forecast: Heightened Chance of Reversal Higher, Despite Overarching Downtrend

Image © Bank of Canada

- GBP/CAD in downtrend, but risk of reversal growing

- Current outlook neutral and balanced

- Canadian Dollar to me moved by global risk trends

The GBP/CAD exchange rate is trading at around 1.5964 at the start of the new week after falling 0.65% in the week before which takes 2019's loss to 8.0%.

Studies of the charts are showing that the pair has reached a crossroads where despite the downtrend being intact the risks of a reversal higher have also grown considerably.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair falling in a step sequence lower. Whilst normally we would expect the downtrend to continue and the bias would be negative, there is evidence, especially on higher time frames, that the risks of a reversal have now increased, and this makes us neutral overall.

The close proximity of some very important historical lows from 2016 and 2017 are likely to provide underpinning strength for prices since these sorts of key historic lows have a habit of providing hard floors from which prices often bounce or reverse trend altogether.

Another bullish sign the pair may go higher in the short-term, is the RSI momentum indicator which is converging with price. This happens when the price makes a new low but the RSI does not. It suggests waning bearish momentum and a risk of a bounce.

Yet despite these signs price action has not rebounded strongly enough to suggest a reversal and so a break below the 2016/17 lows, confirmed by a move below 1.5700, would reinvigorate the bear trend and suggest a move down to the next target at 1.5500.

Likewise, a move above the 1.6230 August 7 highs, would provide bullish confirmation of a reversal higher, and probably lead to a continuation up to a target at 1.6400.

Alternatively, if neither of these levels are breached, and given the neutral outlook, there is also a possibility of a sideways market move unfolding.

The daily chart shows the pair falling in a dominant downtrend.

Although the pair looks very bearish and likely to continue declining the major 2016/17 lows lie in its way ready to impede further progress.

Price action is also converging bullishly with RSI momentum and this suggests heightened risks of a recovery bounce unfolding.

The key upside target is at 1.6470 where the 50-day moving average (MA) is situated and likely to present resistance to further gains.

The main downside target is at 1.5000 which is a major whole number and therefore likely to present itself as a possible target where the exchange rate will probably pause as traders take profit on their bearish bets and more buyers enter the market.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the pair having completed a ‘measured move’ which began at the 2018 highs.

The pattern is now probably complete as the final c-d leg has reached the same length as the a-b leg. Selling pressure is therefore likely to reduce, and the pair will probably start rising.

The fact the RSI momentum indicator is inside the oversold zone, which suggests positioning may be stretched to the downside, further increases the risk of a rebound higher.

Nevertheless, the downtrend remains intact and if the pair can break below the 2016 lows it could fall all the way to 1.4750 in the long-term.

This is the target based on a 1.618 ratio projection of the initial a-b leg, as on rare occasions the c-d leg of a measured move can unfold by a greater than equal amount, and if so it is often by 1.618 x the length of a-b.

Alternatively, a reversal higher is also possible and could reach a long-term target at the 1.6590 historic lows, which are likely to present resistance to bulls.

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The Canadian Dollar: What to Watch

The main driver of the Canadian Dollar is likely to be global risk trends in the week ahead as domestic data is light.

The escalating trade war between the U.S. and China has the potential to have a negative impact and continues to be a focus for markets.

In this respect, Chinese industrial production data out at 3.00 BST on Wednesday, may impact, as analysts will be checking the data to see the economic cost of the trade war. Current estimates are for a 5.8% rise but if the actual result undershoots risk trends could turn negative weighing on the CAD in the process.

The domestic economy continues to hum along reasonably nicely: recent Canadian jobs data showed some moderation as both part-time and full-time jobs actually fell by 24k in July, however, this was offset by the yearly data which showed an overall gain of 353k, and an even stronger rise in average earnings.

Housing data has also been robust which is a good sign for the economy. Recent data showed a very strong 222k rise in housing starts, which is a solid indication.

Overall, most analysts still expect the Bank of Canada (BoC) to leave interest rates unchanged. This sets the BoC aside from the majority of central banks which are cutting rates.

Since lower interest rates are negative for a currency the Canadian Dollar is, therefore, likely to remain relatively well supported.

“All in all, this week’s data releases will likely be brushed off by the Bank of Canada, which we expect to remain on the sidelines,” says TD Securities, a Toronto-based investment bank. “Looking ahead, slowing global growth concerns and escalating trade uncertainty are likely to receive increasing attention given their potential impacts on Canadian trade, manufacturing, and financial conditions. The central bank will weigh this against otherwise healthy domestic conditions and the financial stability implications of lowering rates further.”

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