GBP/CAD Rate: News, Data, and Forecasts for the Week Ahead

The Pound is expected to lose ground against the Canadian Dollar with the result that GBP/CAD will continue falling, due to the diverging policy paths of the two respective central banks.

Whilst the Bank of Canada (BOC) has already raised interest rates and is expected to continue raising them, the Bank of England (BOE) has less clear plans.

Currencies appreciate as foreign capital moves towards them, and a major driver of those flows is higher interest rates.

As such, the direction of future flows is expected to be from the relatively low-interest rate environment of the UK into the higher rates offered in Canada, helping to strengthen the Canadian Dollar at the expense of the Pound. 

"We recommend investors sell GBP/CAD at current levels (1.6025) with a target of 1.4900 and a stop loss at 1.6400," says Commonwealth Bank of Australia's chief strategist Richard Grace, highlighting the point about central banks as the main deciding factor in his long-term bearish forecast.

"Real (deflated by headline CPI inflation) interest rate differentials between the U.K. and Canada can turn more negative consistent with GBP/CAD closer to 1.4900 over the next few months," he goes on, adding:

"The Bank of Canada’s interest rate normalization cycle has only just begun and the Bank of England is in no rush to raise rates anytime soon."

Although we see much merit in Grace's view we are not quite as exuberantly bearish in our own technical forecast yet, seeing the next major target down at 1.5870.

Our short-term target would be confirmed as 'activated' from a break below 1.5996.

The one proviso to the bearish consensus view is that the MACD momentum indicator is not corroborating the latest move down, reflecting a lack of bearish vigour, and this could be a sign the downtrend is either weakening or about to begin a more consolidative, plateauing phase. 

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Data and Events to Watch for the Canadian Dollar

The main release for the Loonie in the coming week is Q2 GDP data, which is expected to come out at 3.6-3.7% (quarter on quarter) much in line with Q1's 3.7% result, when it is released on Thursday, August 31, at 13.30 BST.

On a monthly basis, June is forecast to show 0.1% growth compared to May's 0.6%.

The Loonie at risk of stalling in the week ahead, says BK Asset Management's Kathy Lien, as she foresees the possibility of a weak Q2 GDP result.

"Next week’s economic reports may not be as kind to the loonie – retail sales and trade were weaker in June which means GDP growth that month and the second quarter could fall short of expectations," said Lien.

ING Bank's Chris Turner, however, thinks the opposite, citing the Canadian economy's "broad-based" growth as a reason to expect a robust Q2 result, so the jury is out.

He goes on to suggest a strong GDP result may already be priced into the exchange rate and so CAD is more likely to be influenced by the forward looking July industrial production and the Current Account (Tuesday at 13.30) and August manufacturing PMI (Friday at 14.30) also due next week.

Data and Events to Watch for the Pound

It is a thin week for UK data with the only releases of any significance Consumer Confidence on Thursday 31 at 12.05 BST, and Manufacturing PMI, on Friday, September 1 at 9.30, although analysts do not see either as being market moving.

House Price data from Nationwide will also be released at 7.00 on Tuesday, August 29.

But it will be Brexit negotiations that matter for Sterling in the coming week as the EU and UK sit down for their third round of talks.

"The central bank’s ongoing concerns about Brexit, uneven data and the prospect of a stronger U.S. Dollar, kept Sterling under pressure and we believe these same factors will lead to the currency’s continued underperformance this coming week," says BK Asset Management's Kathy Lien.

"The last we heard, Brexit talks could be delayed until December – 2 months later than planned as disagreements have caused the Government to hope for a change in the German government. Germany holds federal elections at the end of September but Angela Merkel is widely expected to win," adds Lien.

The U.K. government is sticking to its view that they should not pay a penny more than their legal obligations according to foreign minister Boris Johnson. However, Johnson has also made clear last week that the UK accepts it has obligations with regards to paying a settlement fee.

So this could be constructive in that the Government is showing some unity of purpose and are notably softer in rhetoric.

News that the opposition Labour party appear to be shifting to a much softer version of Brexit, however, could offset the slide in Sterling if it pressures the Government to adopt a similar stance.

Shadow minister for Brexit, Kier Starmer, has set out Labour's revised position in an Observer article this weekend, which has the potential to rattle markets. 

Labour's new position is that the UK will keep membership of the Economic and Customs union - but not the political union - during a handover period of 4 years after the official exit date in 2019, with a view to potentially retaining some aspects of membership forever, and negotiating out those which are less desirable.

With markets so negative on Sterling we believe the risks are now to the upside. Specifically, if EU Brexit negotiator Chief Michel Barnier were to say at the conclusion of this week's negotiations that progress has been made, the Pound could pop.

The UK Government's position papers, released over recent weeks, should provide welcome clarity for negotiations. If some good progress can be made over coming days the oversold Sterling might find the fundamental trigger to a recovery.