Pound-to-Canadian Dollar Rate: Technical Forecast and Events to Watch in the Coming Week
The Pound-to-Canadian Dollar is in a short-term uptrend, which despite recent signs weakness and reversal is still technically intact and thus on balance still likely to extend.
Nevertheless, we also accept that the pair presents an ambiguous outlook with also much potential for weakness.
The pair formed a two bar reversal pattern on Thursday and Friday after it rose in a strong, long up-day and the then immediately fell in an equally weak, long down-day.
Such a pattern of activity is deemed a sign of reversal and could bode ill for the pair in the days to come; and it is now quite possible the pair could follow this 2-bar reversal with more downside during a period of weakness.
The possibility is further supported by the fact the exchange rate has intersected with both the 50 and 200-day moving averages during the formation of the reversal pattern.
Major moving averages are levels of dynamic support and resistance which present tough obstacles to the trend and sometimes even lead to the trend reversing course.
It is possible, therefore, that GBP/CAD’s short-term uptrend from the late August lows could now reverse and start falling, or perhaps undergo a fairly deep correction.
However, given there has not been any opportunity for a follow-through lower yet, the up-trend is still technically intact and as such the balance of probabilities still favour an extension higher.
A break above the 1.6800 level would confirm a clear break above the MA’s and dismiss the 2-bar as a failure, leading to a probable continuation higher to the major trendline at 1.6950.
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News, Data and Events for the Canadian Dollar
Last week’s data was underwhelming, with inflation only rising by 0.1%, which was slightly less than expected, and Retail Sales also undershooting expectations.
The negative data surprise calmed expectations the Bank of Canada (BOC) might continue raising interest rates, and since higher rates are supportive to the currency, the outlook has recently dimmed for the Canadian Dollar (Loonie).
This actually supports the established uptrend in GBP/CAD despite the signs of reversal on the chart, and traders may be surprised by a continuation higher in the week ahead.
From this perspective the key event may be BOC governor Poloz’s speech on Wednesday since if he signals that the BOC are unlikely to raise rates in the near future it could lead to a selloff in the Loonie and a rise in GBP/CAD.
Also of significance is Canadian GDP in July, released at 13.30 BST on Friday September 24, with expectations for a 0.1% rise – any higher and the Loonie may recover.
Events and Data for the Pound
The fourth round of EU-UK Brexit negotiations commence on Monday, September 25.
The talks follow Prime Minister May’s Florence speech, with its 2-year transition and chief EU negotiator Michel Barnier’s moderately positive reaction to the speech, seems to be biased to supporting rather than undermining Sterling.
Negotiators are set to brief the press on the outcome of this round of talks on Thursday and the key for currency markets will be whether Barnier indicates he believes progress is being made.
The worst possible outcome for Sterling would be a disruptive Brexit - where negotiations fail to deliver a credible trading relationship between the EU and UK when the UK exits the Union in March 2019.
The first round of talks that see legacy issues and the practicalities of the exit dealt with must be cleared before talk of the trading relationship begins.
Also ahead, speeches by Bank Of England’s Mark Carney on Thursday and Ben Broadbent on Friday could provide potential focal points for Sterling traders.
The current market view is that the BOE is embarking on a tightening cycle with analysts now even pencilling in the likelihood of a November rate hike; and the speeches need to be read in light of that more hawkish backdrop.
Markets presently assign an 80% chance of a November rate rise.
Clearly an increase in hawkishness via stronger confirmation of a November rate move by either speechmaker would lead to fresh gains for the Pound, which is positively correlated to interest rates.
Data-wise, the next most significant release could be the Current Account for Q2, at 9.30 BST on Wednesday, September 27, which is forecast to show a slight reduction in the deficit to -15.8bn from -16bn in Q1.
A deeper contraction could help the Pound.
At the same time as the Current Account data is released Business Investment data will also be released for Q2 and will offer a further insight into the strength and resilience of the economy.