The Pound-to-Canadian-Dollar Rate in the Week Ahead: New Uptrend Set to Extend

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- GBP/CAD spikes higher after bottoming out on charts.

- New uptrend can extend but short-term pullback possible.

- GBP to be moved by Brexit as CAD eyes the oil markets.

The Pound-to-Canadian-Dollar rate is set to begin trading around 1.6602 this week after closing the previous one around 2.63% higher on Friday, which kickstarted a new uptrend that is poised to extend further over the coming days.

The 4 hour chart, used to determine the short-term outlook over the coming week, shows how the pair completed a bullish reversal pattern called a ‘broadening ending diagonal’ before breaking out higher. These patterns usually mark the end of long trends and are often followed by volatile breakouts as has been the case with this one.

The pair has already risen substantially but it is expected to continue advancing this week. The initial target for any breakout is calculated by taking the height of the down-pattern and extrapolating it by a ratio of 0.618 - the golden ratio, or Fibonacci ratio, which in this case generates an upside target of 1.6780. 

A break above the 1.6620 level would provide the green light for an extension higher to the above-mentioned target. However, the relative-strength-index (RSI) momentum indicator in the lower panel below is overbought enough to suggest some sideways consolidation is likely before the uptrend resumes. 

Above: Pound-to-Canadian-Dollar rate shown at 4-hour intervals.

The daily chart shows the pair rising strongly since basing in August. We see a continuation higher to 1.6950 looming, which is also the level of the 200-day moving average (MA). The daily chart is used to give us an indication of the outlook for the medium-term, which is defined as the next month ahead. 

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

The weekly chart, which we use to give us an idea of the longer-term outlook including the next few months, shows the pair having completed a larger ‘measured move’ that 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. The pair is likely to continue rising with one possible long-term bullish target situated at the level of the 200-week moving average around 1.7330.  

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Above: Pound-to-Canadian-Dollar rate shown at weekly intervals.

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The Canadian Dollar: What to Watch

The main releases for the Canadian Dollar in the week ahead are inflation (CPI), retail sales and manufacturing data, although the price of crude oil will also be an important influence.  

The Canadian economy is puttering along quite well and although manufacturing is starting to feel the impact of the global trade slowdown, other sectors such as housing and construction have been on the up recently.

“This week’s data showed a Canadian economy that has rebounded to a healthy pace of expansion in the middle of this year. Booming new residential construction is helping lead the way,” says Mark McCormick, head of FX strategy at TD Securities. 

As a result of its relatively strong domestic economy, the Bank of Canada (BoC) is not expected to cut interest rates as soon or as much as most other developed world central banks, which is why the Canadian Dollar is the best performing major currency of 2019.

“Economic indicators will be watched out of Canada next week for more clues about the direction of monetary policy after the Bank of Canada failed to provide any signals at its meeting earlier this month,” says Raffi Boyadijian, an investment analyst at broker XM.com.

Data out in the week ahead however, will inform the extent of any cuts that could be being mulled. First up is manufacturing sales for July, out on Tuesday and forecast to show a -0.3% slowdown compared to the -1.3% decline in the previous month.

These figures will provide an insight into how much the global slowdown in the sector is impacting Canada. Next up are August CPI numbers, which are expected to show a -0.1% fall when they are released at 13:30 BST on Wednesday. This would be lower than the 0.5% of the previous month. 

Retail sales are forecast to show a 0.6% rise in July compared to 0.0% in the previous month when they are released at 13.30 BST on Friday. The main reason for the fall in CPI is gasoline prices which are not reflective of demand so are unlikely to impact on CAD. More important will be core CPI which has food and fuel stripped out. 

“Lower gasoline prices will provide the main catalyst for the deceleration with a 4% decline in the price at the pump, which would contribute to a larger (0.28pp) drag from energy on a year-ago basis.This headwind is set to intensify to 0.4pp by September before base effects from the 2018Q4 collapse in oil prices bring about a rapid recovery on a year-ago basis,” says TD Securities' McCormick. 

The main reason for the outsized fall in Loonie last week was a large drop in oil prices following the OPEC meeting, and oil is again likely to be an important driver of the Canadian Dollar in the coming days. However, reports of a drone attack on a Saudi oil field this weekend could mean oil prices rise and support the Loonie on Monday.

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The Pound: What to Watch

Brexit will probably continue to be the main driver of the Pound in the coming week despite high profile events like the Bank of England (BOE) interest rate decision on Thursday, inflation data on Wednesday and retail sales Thursday. 

The UK government’s progress towards agreeing a Brexit deal with the EU before the October 31 deadline is likely to take centre stage, with the main focus on finding a solution which maintains a frictionless border with Ireland after Brexit so as to maintain the integrity of the Good Friday agreement.

It is said the government is considering a variety of different options in this regard, including placing a border down the Irish sea with Northern and Southern Ireland having greater regulatory alignment. This would especially be the case in the ‘agri-food’ and electricity sectors where the whole island is already heavily integrated as one. 

Rumours of a breakthrough helped the Pound storm to new highs last week and there is a risk the same might happen in the week ahead. Recent surprisingly strong data has eased concerns the UK might be entering a recession but economic figures are likely to play only a minor role in the Pound’s trajectory. The BOE meeting on Thursday is also unlikely to cause volatility since the bank will probably not alter its policy until after the Brexit process. 

“We are not going to get that (a change in policy) from the BOE,” says Raffi Boyadijian, a strategist at XM.com. “They have so far stood by their slight tightening bias; and given the expected extension to the Brexit deadline, which we are likely to get out to the end of January next year - unless we get a Brexit deal - and the easing risks of a UK recession, after recent UK data has surprised to the upside, there is no risk of an imminent recession in the UK."

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