GBP/CAD: Week-Ahead Forecast

The Pound to Canadian Dollar (GBP/CAD) continues falling in a solid short-term downtrend which began after the exchange rate rolled over at the early November highs.

It has now met and moved below our last target at 1.6000.

There is no sign the down-trend is about to end but we do not that  it is close to tough resistance from the October lows at 1.5913, which may prove an obstacle delaying further downside.

Ideally, we would want to see a clear break below these lows, confirmed by a move below 1.5880, before expecting an extension of the trend to the next target at 1.5800.

The MACD indicator has pushed clearly below the zero-line indicating the exchange rate is probably in a bear trend, which is likely to extend.

Uncertainty Reigns on Trump's Impact on CAD

Donald Trump is inaugurated this week, and this should help heighten focus on what the new President means for the Canadian economy and its currency.

Analysts are split between those who see Canada as benefiting from the expected growth in the US and the stronger Dollar and those who see a risk from Trump’s protectionist agenda.

The incoming president has said he wants to renegotiate NAFTA – the North Atlantic Free Trade Agreement – and if this involves an increase in tariffs on Canadian goods this is likely to be negative for CAD.

HSBC said not long ago that it expected the Bank of Canada to cut interest rates to help stimulate the Canadian economy, however, the chances have lessened substantially since a string of excellent economic data results at the end of 2016 improved the outlook for the economy.

Data for the Canadian Dollar

The main event for the Canadian Dollar is the Bank of Canada interest rate decision on Wednesday, January 18 at 15.00 GMT.

This is unlikely to have a strong impact on the Canadian Dollar, however, as most analysts expect the Bank of Canada (BOC) to maintain a neutral stance.

“When they last met in December, the BoC said the dynamics of Canada’s growth were largely as anticipated and current monetary policy stance remains appropriate.

“Since then, data has been mostly better with retail sales, trade, employment and the IVEY PMI index rising,” said BJ Asset Management’s Kathy Lien.

Later on in the week, on Friday, January 20, the other major release for the Loonie comes in the form or inflation data.

CPI for December is released at 18.30, and of most interest will be the month-on-month result as it gave a -0.5% reading in November and analysts will want to be sure a deflationary spiral has not set and that December’s result is more robust.

At the same time, Retail Sales is scheduled for release, with core Retail Sales expected to show a 0.2% rise in November and Headline Retail Sales a 0.5% rise.

Be Aware - the Pound Could be Rocked Monday by Latest Brexit Revelations

The big news for Sterling over the weekend were reports that Theresa May will make immigration a red line in upcoming Brexit negotiations.

This suggests the UK is to give up seeking access to the European single market.

Reports have suggested she will signal pulling out of the EU single market and customs union, although Downing Street described this as "speculation".

"All eyes on PM May as she outlines the government's Brexit strategy in a speech this week (Tue). Early indications suggest single market access is unlikely to be retained - a headline which could send GBP sharply lower," says Viraj Patel at ING in London.

In an interview with German Welt am Sonntag newspaper, Chancellor of the Exchequer Philip Hammond said he was "optimistic" a reciprocal deal on market access could be struck, and that he hoped the UK would "remain in the mainstream of European economic and social thinking".

"But if we are forced to be something different, then we will have to become something different," he said.

It seems the Government is prepared to exit the single market and we watch for some notable volatility in Sterling when markets open on Monday.

Data for the Pound

UK inflation data is released on Tuesday, January 17, at 9.30 (GMT), with CPI expected to come out at 1.4% year-on-year in December, up from 1.2% in the previous year, and 0.3% month-on-month.

A higher-than-expected rise in CPI is likely to weigh on the Pound as resulting from a weaker Pound rather than stronger growth.

It will, therefore, be seen as further stretching already tight household budgets.

Wednesday, Jan 18 at 9.30 sees the release of Employment Data, including the Unemployment Rate, Average Earnings and the Claimant Count.

Earnings are expected to rise 2.6% rise in November, and the Claimant Count by 5.0k.

The Unemployment Rate is expected to come out at 4.8%.

On Friday, January 20, Retail Sales are scheduled for release at 9.30, and expected to show a 0.2% rise month-on-month in December.

It is forecast to rise 7.2% year-on-year in December.

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