Pound Undergoing Sharp Correction vs. Canadian Dollar shows Technical Forecast
Image © Bank of Canada
- GBP/CAD is pulling back after its rally
- The correction is deep and could persist
- Pound will mainly be driven by Brexit news
- Canadian Dollar to be moved by Bank of Canada meeting
The Pound-to-Canadian Dollar exchange rate is trading at around 1.6789 at the start of the new week after falling 1.73% in the week before. The pair has undergone a sharp correction and we no longer see the potential for further gains in the short-term as has been the case in our recent week ahead forecasts.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week - shows how the pair has pulled back in an ‘abc’ correction since peaking at the 1.7094 highs.
The pullback is relatively steep and could continue lower to the next major support line at 1.6605 where the August 2018 low is situated.
That low is likely to contain the downtrend and could serve as a floor from which the pair may bounce.
Firm resistance from the 200-day moving average (MA) at 1.6880 will probably prevent further gains and the pair could oscillate between there and the August lows for the remainder of the forecast period.
The RSI momentum indicator in the bottom pane has been falling in line with the correction and is bearishly low. This suggests a greater likelihood of more downside as the correction extends.
The daily chart is looking mixed: it shows how the pair needs to break above the October 17 highs at 1.7094 to predict a continuation of the uptrend higher to a target at 1.7220.
Alternatively, a break below the 1.6600 August 2018 lows would suggest a bearish extension down to the trendline at 1.6400.
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 risen quite strongly since the August 2019 lows and this new uptrend might well continue.
Assuming the pair can break above the October 17 highs it could probably go higher, and if I can also break above the
200-day MA at 1.7220, then it will probably also continue up to a target at 1.7500.
The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.
Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here. * Advertisement
The Canadian Dollar: What to Watch this Week
The main driver of the Canadian Dollar in the week ahead is probably the policy meeting of the Bank of Canada (BoC) on Wednesday at 15.00 BST.
The reason it is so important is because the BoC sets base interest rates which are highly correlated to the Canadian Dollar.
Higher interest rates strengthen CAD because they attract greater inflows of foreign capital; whilst lower rates have the opposite effect.
The BoC is however not expected to change interest rates on Wednesday because the Canadian economy is quite strong and inflation is at about the BoC’s 2.0% target.
“The Bank of Canada is widely expected to keep rates unchanged at 1.75% during the October policy meeting, where updated economic projections will balance a better-than-expected 2019 with modest downgrades to the 2020 outlook,” says Canadian investment bank TD Securities. “Q2 GDP and Q3 CPI came in well above projections from the previous MPR, but the global backdrop has softened since July.”
What will therefore be more important for CAD is the forward guidance element of the event: what the BoC says about the future and whether it is considering changing interest rates then.
Most analysts suggest the BoC will strive to keep a neutral bias, i.e. one that suggests policy makers are content to sit back and watch the economic data evolve.
However, with the U.S. Federal Reserve expected to cut interest rates this week, the pressure could fall on Governor Stephen Poloz and his team to strike a softer tone on the outlook, as they would be wary of Canada's interest rates being above those of the Fed for any extended period of time.
Such a scenario could well put upward pressure on the CAD and prove to be a headwind for the Canadian economy going forward, thereby encouraging the BoC to strike a softer tone in order to keep CAD under some degree of pressure.
"On Thursday the rare occurrence of a Federal Reserve and Bank of Canada double act occurs, with both currently posting rates at similar levels. Domestic economic conditions have made a rate cut by the Bank of Canada an infinitesimal probability this week, suggesting US benchmark rates are set to fall below Canada’s for the first time since December 2016. If the Fed does bow to market pressures and delivers a rate cut, the loonie will become the highest yielding G10 currency. Against the US dollar, a breach of the $1.30 level is almost an inevitability in the coming periods given no deterioration in domestic economic conditions or the markets risk appetite causing a sell-off in crude," says Simon Harvey, an analyst with Monex Europe.
Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here. * Advertisement