Pound-to-Canadian Dollar Rate Week Ahead Forecast: Potential for Recovery Emerging

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- GBP/CAD trading in a range at a major trendline

- Possibility of further upside in short-term

- Canadian Dollar to be moved by inflation and retails sales data

The GBP/CAD exchange rate is trading at 1.6069 at the start of the new week after rising 1.39% in the week before.

Studies of the charts are showing that the pair is in a sideways range with a break above key highs or lows required to establish a more directional bias, however, if pushed to make a choice, the outlook looks marginally more constructive for the pair overall.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair rising in a step sequence higher within the bounds of a range.

It has now completed two sets of higher highs and higher lows which is one of the first signs a new uptrend may be beginning.

A break above the 1.6195 August 16 highs would probably result in the pair rising up to the top of the range at 1.6230.

However, there is a possibility that the pair could also fall and trade sideways within the bounds of the range in the short-term.

A break above or below key highs or lows is required to provide a directional bias.

A break above the 1.6230 highs - confirmed by a break above 1.6250, for example - could provide more upside for the pair and target the next target at 1.6400.

The RSI momentum indicator is converging with price which could support the bullish outlook. 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.

Alternatively, a break below the 1.5880 range lows could lead to a continuation of the broader downtrend lower to a target at 1.5750.

The daily chart shows how the pair was previously falling in a steep downtrend before it found support at a major trendline and bounced. It is now going sideways on the trendline.

The pair could either use the major trendline as a support level and start rising or break right through it - further confirmation from more up or downside is required before determining which scenario is going to play out.

Although the pair looks very bearish and likely to continue declining the major 2017 lows lie in the way ready to impede further downside progress.

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

A break above the range highs would probably lead to a move up to a target at 1.6400 where the 50-day MA is situated followed by a continuation up to a further target at 1.6560.

A break below the range lows at 1.5880 would probably lead to a move down to 1.5750 and the 2017 lows followed by a move down to 1.5500, the target for the range breakout based on the height of the range.

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 likely to reduce, therefore, and the pair could very well start rising.

The fact the RSI momentum indicator has just exited the oversold zone and is rising is a buy signal for the pair and indicates the likelihood of more upside on the horizon, and the long-term, a rise up to a target at 1.7000 is possible.

Nevertheless, the downtrend still 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 often by 1.618 x the length of a-b.

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The Canadian Dollar: Key Drivers

The key releases for the Canadian Dollar in the week ahead are July inflation data on Wednesday and June retail sales data on Friday.

Analysts will probably be keeping a close eye on these releases because a worsening global backdrop is seen as a threat to the idiosyncratic growth experienced by Canada domestically.

Last week’s employment data was under par, however, and was the first glimpse that weakness from the global slowdown might be ‘seeping in’ to negatively impact the domestic economy.

If the data this week is also poor, therefore, there may be cause to start to price into the Canadian Dollar the possibility the Bank of Canada (BOC) may have to cut interest rates later in the year.

“Despite housing data and other indicators, such as stronger wage growth, indicating a healthy domestic economy, there is growing unease on the international stage. Germany may be entering a recession while growth in China could be slowing more than expected,” says TD Securities, a Canadian Investment Bank based in Toronto. “Meanwhile, the U.S.-China trade war has intensified further and doesn’t appear to have any end in sight. These developments were reflected in a brief but telling inversion of the U.S. 10 to 2-year yield curve this week. Among all this external gloom, the only reprieve is a robust U.S. consumer, which should provide some lift to Canadian exports.”

Canadian inflation data in July is expected to show a rise of 0.1% compared to June when it fell by -0.2%, when it is released at 13.30 BST on Wednesday.

Inflation is currently at 2.0% on a yearly basis, which is right on the Bank of Canada’s target.

Retail sales data is forecast to show a -0.1% decline in June - the same as the -0.1% decline it suffered in May - when it is released on Friday at 13.30 BST.

Worse-than-expected data could risk hurting CAD and helping the rebound in GBP/CAD.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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