Pound to Potentially Extend Gains v Canadian Dollar Suggest Technical Studies

Pound Sterling has pushed higher against the Canadian Dollar despite commentary from the governor of the Bank of Canada (BOC) recently which has lent support to the broader Canadian Dollar complex.

The currency gained in most pairs, including versus the US Dollar after BOC governor poloz suggested the economy was robust enough not to need the level of stimulus currently being supplied by the BOC.

Easing UK political risks and technical trading have meanwhile supported the Pound and our studies suggest the technical outlook remains favourable for the Pound.

Looking at the monthly chart - which covers a longer-term timeframe - we note that technically GBP/CAD is showing bullish signs despite still being in a downtrend on lower timeframes:

The last two months of May and June, have both been red down months which have occurred within an up-move which began at the October 2016 lows.

This suggests they were probably corrective in nature, and research has shown that when two consecutive down-months happen within an up-trend the next month has a higher probability of being bullish.

The set-up accurately predicts that the next month will be a green up-month to a 66% degree of probability.  

There is, therefore, a higher than evens probability that we are beginning a bullish month for Sterling against the Canadian Dollar.

Also looking at the monthly chart, we note how the exchange rate finished a clear a-b-c move, also known as a measured move, when it formed the October 2016 lows.

The pattern is clearly delineated and waves ‘a’ and ‘c’ are of roughly equal length.

When an a-b-c pattern finishes it is often a sign a change of trend will occur afterwards, which further adds weight to the evidence that we are at the start of a new uptrend for the pair, and that July will be bullish.

Nearer-Term Studies

The daily chart, which addresses the shorter- to medium-term prospects for GBP/CAD, shows the pair basing at the level of the 200-day moving average:

The 200-day is a strong level on charts which is often the location for reversals.

This backs up the notion that the pair could be about to rotate and move higher in July.

The daily chart also shows the pair has finished an a-b-c pattern lower on the daily timeframe as well, and this further indicates the possibility that a market down-cycle has completed and the next sequence of activity could be bullish.

We would look for a break above the June highs at 1.7000 to confirm a move higher, with an initial target at 1.7100.

Data, Events to Watch for the Canadian Dollar

The main data event in the week ahead is Canadian Employment data at 13.30 BST on Friday, July 7.

Employment Change in June is expected to show a 15k rise from 54.5k previously.

The Unemployment Rate is expected to remain unchanged at 6.6%.

“We look for job growth to slow to 5k in June on a pullback in manufacturing and continued weakness in the real estate industry. A partial reversal of May's rotation into full-time employment will add to the downbeat tone. While policy makers will look past a single weak report and focus on the robust trend, markets may be overly sensitive to any surprise in the data given market pricing for the July FAD,” say analysts at TD Securities in a note to clients.

Data, Events to Watch for the Pound

The next week is dominated by PMI survey data for June, which shows monthly changes in activity in key sectors of the economy.

PMI’s are plotted on a gauge, with a result below 50 representing contraction and above 50 expansion.  

On Monday at 9.30 BST, Manufacturing PMI is released and is expected to tick down to 56.5 from 56.7.

On Tuesday, at the same time, Construction PMI is forecast to fall to 55.00 from 56.00.

Finally, on Wednesday the most important PMI for the Services sector is forecast to show a fall to 53.5 from 53.8.

The results will be analysed within the context of ongoing concerns about growth given the sharp slowdown which has occurred on the high-street and the fall in real wages.

Investment bank TD Securities see a chance of an even deeper undershoot than consensus, with Manufacturing falling to 55.7 rather than 56.5 and Services to 52.8 rather than 53.5:

“Given the political uncertainty that came out of the general election, we look for a decline in the June PMIs, though much more moderate than the post-Brexit shock last year. We saw the first hint of that kind of reaction with the GfK consumer confidence survey, which saw a fairly sharp decline in June.”

Clearly a surprisingly weak figure will hurt sterling.

Other data includes Manufacturing and Industrial Production, the NIESR GDP Estimate and Halifax House Prices, all out on Friday at 09.30 BST.