Pound-Canadian Dollar Week Ahead: Looking for an Upside Break but Risking More Range Trading

- GBP/CAD poised for 1.7010-to-1.7209 range in week ahead. 
- But daily close above 1.7175 offers 400 points upside for GBP.
- Would trigger inverse head & shoulder pattern on daily charts. 
- GBP needs risk rally to get above 1.7175, but appetites souring.

Image © Pound Sterling Live

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The Pound-to-Canadian Dollar rate edged on a strong Friday performance last week and it could attempt an upside breakout from its recent stiflingly narrow range in the days ahead, although the risk is of more range trading. 

Sterling ended the week on its front foot after economic data challenged the popular perception of an economy lagging its rivals in the race out of the coronavirus trough. Brexit negotiations went almost nowhere, although the ongoing deadlock was not enough to trouble Sterling beyond Thursday.

Price action still left the Pound-to-Canadian Dollar rate confined to a stiflingly narrow range, which could endure over the coming days if risk appetite continues to sour, as some think it might. U.S.-China tensions are rising and second wave outbreaks of coronavirus in Spain, Japan, Hong Kong and others are drawing attention, while stock markets have begun to soften. All are a recipe for a potential correction by the U.S. Dollar, which has been penalised of late owing to its own second wave.

"Trade tensions rise and data are casting doubts around the US economic recovery (Canada is inevitably highly exposed to US economic troubles)," says Francesco Pesole, a strategist at ING, who looks for a 1.3340-to-1.35 USD/CAD range this week. "CAD has had a less overstretched run in the past few weeks compared to its peers AUD and NZD, is less exposed to China and its lingering net short positioning appear to suggest a relatively more limited downside."

GBP/CAD would trade between 1.7010 and Sunday's opening level around 1.7150 in a risk averse market where GBP/USD tests support between 1.26 and 1.2660, while USD/CAD looks toward its nearest major resistance barrier just under 1.35. This would be very much a repeat of last week's range.

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

The Pound-to-Canadian Dollar rate would trade between 1.7158 and 1.7209 in a risk happy market where Sterling tests 1.29 against the greenback and USD/CAD falls to between 1.33 and the top end of Pesole's price range at 1.3340, although this outcome could be a game-changer for Sterling.

"The 200-day MA appears to be contributing to a slowdown in the GBP’s rise," says Juan Manuel Herrera, a strategist at Scotiabank, of the GBP/CAD rate. "We note that the June/July sideways movement in the GBP may be developing an inverse Head & Shoulders pattern—with the 1.7175 area effectively designating the bullish break out point. The chart formation implies upside potential of a little over 400 pips on a clear move above the neckline trigger." 

Sterling could be lifted above 1.7175 in a risk-on market where the Pound-to-Dollar rate continued to celebrate IHS Markit PMI signals of a July thaw economic thaw that saw barometers of the UK's manufacturing and services industries rise above those of their Eurozone and U.S. counterparts. This would be a trigger level for the inverse head & shoulders pattern flagged by Scotiabank and gains that imply a rally by the Pound-to-Canadian Dollar rate up to 1.7575.

Above: CAD/USD rate shown at daily intervals alongside GBP/USD (orange line).

A tentative third quarter recovery in either the UK or neighbouring countries would be placed at riskhowever, by a another wave of coronavirus in mainland Europe so the Pound might need a fresh catalyst for the above move. Brexit negotiators hold informal talks this week though expectations for a breakthrough are low. The next round of formal talks gets underway on August 17. 

"Rising geopolitical tensions may cause the risk off tone to linger into next week. We believe this would be a good opportunity to add to USD shorts as the virus recovery and sustained central bank liquidity should take precedence," says Sarah Ying, a strategist at CIBC Capital Markets. "USD/CAD saw a false breakout at the 1.3400 level, though the trading range has been narrow since early June at 1.3316-1.3716. There is a dearth of data until GDP next week, so the range is expected to hold."

All risk currencies gained over the Dollar last week but Friday saw the Canadian Loonie crack and the coming days may see weakness spread if the Federal Reserve (fed) is unable to revive the stock market rally at 19:00 on Wednesday. With the U.S.-China tensions, coronavirus infection numbers and the Fed aside, markets will likely take cues from U.S. and Canadian GDP numbers due later in the week. Eurozone GDP data is also due out on Friday.

Above: USD/CAD rate shown at daily intervals.

"We’re often asked about the shape of the path we expect real GDP or employment to trace out. Is it a “U”, a “V’, some other letter? The incoming data increasingly suggest that the US might end up being the VW economy, with no relation, of course, to a certain German carmaker," says Avery Shenfeld, chief economist at CIBC, who looks for a -36% annualised fall in U.S. GDP and a +3.9% rebound in Canada for May. "The most informative data will be the advance estimates of June and Q2 GDP which we expect to be released alongside the numbers for May. Look for June to show a nice pop in growth, but that will still leave Q2 with a 42% annualized decline."

U.S. GDP is out at 13:30 on Thursday and consensus is looking for a -35% fall to follow the -5% decline seen in the third quarter, while on Friday consensus expects Canada's May GDP number to be in line with the +3% advanced estimate published by Statistics Canada on June 30.

"We maintain our official Q2 GDP growth forecast at -35.0% q/q saar," says Pooja Sriram, an economist at Barclays. "We expect little new information from the July FOMC meeting. Previous Fed communication has already delivered the message that monetary policy will likely be accommodative for quite some time, if not years. Although the Fed is likely to upgrade its assessment of the incoming data in May and June, the rising number of COVID-19 cases is likely to keep the committee focused on downside risk, the potential scarring of labor markets, and elevated uncertainty."

Above: UK. U.S. & Eurozone PMI surveys alongside Barclays estimates for U.S. and Eurozone GDP figures due this week.