Pound vs Canadain Dollar: Technical Forecast, News, and Events in the Coming Week

The Pound to Canadian Dollar exchange rate is extending its downtrend with Sterling almost completely giving back the gains it made after reaching the August 25 low. 

At the time of writing, the exchange rate is at 1.6051; the downtrend remains intact and we expect it to continue.

A break below the 1.6001 lows would probably confirm a continuation to the next target, which consists in the trendline drawn from the October 2016 and January 2017 lows situated at roughly 1.5925.

That trendline is likely to provide a tough obstacle to further downside.

The MACD indicator - on the bottom pane - is losing downside momentum but not sufficiently to expect a reversal. 

The pair is trading under the 50 and 200 moving averages and the 50 just crossed below the 200 forming a bearish death cross, which is very negative for the exchange rate. 

Scotiabank's Shaun Osborne is also bearish GBP/CAD: 

"GBPCAD retested the 1.60 area earlier and has failed to recover any significant ground from the low. The broader undertone for the cross remains weak and although the market has essentially met our expectations (we have been anticipating a return to the 1.60/1.62 range since mid-year), there is little sign that the downtrend is complete.

"In fact, bear trend momentum signals are starting to align again, suggesting that the GBP drop may extend. Below 1.60, the GBP risks sliding back to the early 2017 low at 1.5720/25. We remain bearish and favour selling into modest GBP gains. Bearish."

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Data, News, and Events for the Canadian Dollar

The main event in the week ahead is the Bank of Canada (BOC) rate meeting on Thursday, at 15.00 BST on Wednesday, September 6.

Analysts are split on whether the BOC will raise rates or not.

CIBC's Avery Shenfield though there was a good chance they might raise rates after the release of better-than-expected GDP data last Thursday:

"A stronger than previously-expected rate of growth in Canada could mean the Bank of Canada brings forward the date for its next interest rate hike, leaving GBP/CAD facing further losses."

Yet TD Securities do not expect BOC to raise interest rates:

"Those chasing a rate hike at the September FAD are likely to walk away disappointed but don't look for the Bank to sound dovish in its policy statement."

"Economic developments since the July MPR have been predominantly positive and we expect Poloz to make only passing mention of the usual risks to the outlook. CAD should soften on the decision to hold and there is scope for a slight pullback in rates, which have gapped higher into the weekend. However, upbeat messaging should preclude a significant rally."

Other important data in the coming week, includes then Balance of Trade in July, which is out at 13.30 BST and is expected to show a narrowing of the deficit to 3.3bn from 3.6bn in the previous month.

Friday's employment data for August may also be significant.

The Unemployment Rate is forecast to remain at 6.3%, Employment Change is forecast to come out at 15k from 10.9k previously but Full-Time employment change to rise by a lesser 18k from the 35k in the previous reporting period.

Data to Watch for the Pound

On Monday, Construction PMI for August is out at 9.30 BST, and on Tuesday Services PMI at the same time.

PMI's are surveys of purchasing managers and provide a snapshot of how conditions are in a particular industry sector.

A score of over 50 indicates expansion and under 50 indicates contraction.

Construction is forecast to come out at 52.0 in August from 51.9 in July, and Services at 53.5 from 53.8 in July.

Thursday, September 7 witnesses the release of Halifax House prices in August at 8.30 BST.

Friday, September 8, sees the release of Industrial and Manufacturing Production for July, at 9.30 BST. 

The former is supposed to show a 0.2% rise and the latter a 0.3% rise.

The Trade Balance in July is out at the same time, and is expected to show a narrowing of the deficit to -11.9bn from -12.72bn previously.

Politics: E.U. to Make an Example of the U.K.

Image (C) European Commission.

While the data calendar hots up over coming days, politics will never be far away as a driver of Sterling.

Concerning headlines over the weekend have confirmed what many in the U.K. fear: the E.U. intends to make an example of the U.K. for its decision to exit the E.U. with chief negotiator Michel Barnier stating negotiations offer an opportunity for the E.U. to "teach the British people and others what leaving the EU means".

Barnier told a conference in Italy on the weekend that while he did not want to punish the U.K. for leaving he did confirm  Brexit would serve as an "an educational process" for the British.

"I have a state of mind - not aggressive... but I'm not naïve," Barnier told the Ambrosetti forum. "There are extremely serious consequences of leaving the single market and it hasn't been explained to the British people. We intend to teach people… what leaving the single market means."

This confirms our view that the E.U. are in fact not in the mood for negotiating; rather they are placing a prescribed set of conditions down before the U.K. which must be accepted, or no deal will be granted.

Brexit negotiations have now passed three rounds, with some progress being made but the E.U. are keen to make it known that none of their initial objectives - particularly on receiving a payment of ~€100BN from the U.K. on its exit from the Union have yet been agreed.

Until the E.U. greenlight the first rounds concerning the technicalities of exit, they are not willing to discuss trade. This leaves Sterling prone to the risk that a disorderly exit takes place.

The big question we are however asking is whether or not Sterling fully reflects such a disorderly Brexit. If it does, then presumably the currency will become increasingly immune to negative newsflow concerning the negotiations. If not, then substantive downside must be negotiated.

Another question to ask, from a currency perspective, is how will dynamics change were the E.U. to be exposed as simply seeking to punish Britain, how does this impact on internal E.U. politics, particularly for countries such as Ireland and the Netherlands which rely heavily on their exports to the U.K?

German manufacturers also rely heavily on the U.K. market and one would expect a clash of economic interests and the political ideology as pushed by Barnier, Juncker and Verhofstadt.

Can pragmatism push the E.U. into a friendlier approach? If the answer is yes, it would certainly benefit Sterling.

Another question for those trying to anticipate the direction of politics and Sterling is to consider whether comments of "educating" the British sit well with the British people?

We saw how Theresa May found a rise in support on her robust response to Jean-Claude Juncker after he labelled her a difficult woman following a dinner in Downing Street. Voters tend to respond well to those defending them, and this might be the case should a seige mentality be established on the back of a daily barrage of warnings and threats from the E.U.

We would suggest that the Government's position on Brexit, and the Conservative Party by extension, might find some support were they to be seen as standing up to the E.U. and having a more flexible approach to negotiations.

And a more secure hand for the Conservative Party would play well for Sterling as a fragile Government makes for uncertainty, and the Pound hates uncertainty.

The prospect of five years without another uncertainty-inspiring vote will be welcomed.