Pound vs. Canadian Dollar Rate Week Ahead Forecast: Broader Downtrend Possibly Resuming
Image © Bank of Canada
- GBP/CAD could be resuming its previous downtrend
- Break below the 50-day moving average to provide confirmation
- Canadian Dollar to be moved by GDP data
The Pound-to-Canadian Dollar exchange rate is trading at around 1.6298 at the start of the new week after falling 1.64% in the week before. There are signs the pair could be resuming its longer-term downtrend and a break below 1.6200 would provide confirmation of this view.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair has completed a 3-wave corrective ABCD pattern and then started falling.
The decline since the September 20 highs could be the start of a deeper sell-off.
One sign it may lead to more weakness is that the sequence of peaks and troughs looks like it may have reversed. Confirmation came after the pair completed two sets of 'lower lows' and 'lower highs'.
Yet GBP/CAD has also reached some sturdy support levels which will probably restrict further weakness.
These include the 50% and 61.8% Fibonacci retracement levels of the previous rally and the 50-day MA (see below).
The retracements are levels where corrections are more likely to end and the uptrend to resume.
The 50% retracement represents the midpoint of the previous move; the 61.8% is the Fibonacci ratio of the move - both have a special significance according to analysts.
For the correction to continue evolving lower, it must first break clearly below the 1.6200 level, which would lead to a move lower to a target at 1.6000 initially.
The daily chart shows how the pair may have completed an ABCD corrective pattern and could be resuming its downtrend.
The pair has fallen to a strong support zone made up of the 50-day MA and the space between the 50% and 61.8% Fibonacci levels.
A break clearly below the zone, confirmed by a move below 1.6200 would be required to confirm more downside, to a lower potential target at 1.5875 and the August lows.
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 shows how the pair has been a long-term downtrend for most of the first half of 2019.
Assuming this trend is resuming it presents longer-term bearish targets for the pair.
A break below the 1.5800 level would give the green-light to a continuation down to a target at 1.5500.
The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.
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The Canadian Dollar: What to Watch this Week
The main release for the Canadian Dollar will be GDP data on Tuesday, whilst the fluctuating price of crude oil could also impact given the importance of the commodity to the country’s trade balance.
GDP data is forecast to show a 0.1% rise in July when it is released at 13.30 BST and although this is not especially high analysts appear quite positive regarding the release.
“Looking ahead to next week’s monthly GDP report, things are shaping up well. Despite the mixed messages in the monthly data, we look for another month of decent economic growth in July,” says TD Securities, an investment bank based in Toronto.
The one component of growth which could weigh on the final result is manufacturing which is slowing along with global manufacturing in general.
“Industry-level GDP growth is forecast to rise by a muted 0.1% in July due to continued softness in the goods-producing sector,” says TD Securities. “Real manufacturing sales fell by 1.6% for their largest one-month drop since April 2018 which suggests that some of the weakness projected by softer PMIs is now showing up in the activity data.”
Falling oil prices had a depressive effect on the Canadian Dollar last week and many analysts are questioning whether this might not be the case in the week ahead.
The Canadian Crude Index fell from post-Saudi drone strike highs of $46.86 per barrel to $41.46 after news of easing middle eastern tensions diffused fears of further strikes.
A combination of news from the region led to the fall in Crude prices.
The first was a report from Reuters that Saudi Aramco, the company hit by drone strikes, had restored production to pre-attack levels.
The second was news that Saudi Arabia had called a partial ceasefire in Yemen which was seen as the catalyst for the original drone attack.
The third was a report suggesting the U.S. might ease sanctions against Iran, a major oil producer in the region which has hitherto been unable to sell its oil due to sanctions.
The removal of so many major risk factors for the commodity suggest it will probably remain subdued and is unlikely to regain the previous peak reached in the confusion following the drone-strike.
From the perspective of the Canadian Dollar, oil market dynamics are therefore likely to prove to be a headwind.
The currency is correlated to oil prices because oil is Canada’s largest export so higher demand increases demand for the currency and drives growth.
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