Pound-to-Canadian Dollar Rate: 5-Day Forecast, Events and Data to Watch

Near-term direction in GBP/CAD looks rangebound but the bigger picture reveals an exchange rate that is turning increasingly bullish. Data this week is meanwhile dominated by inflation releases in both Canada and the UK.

The starts the new week buying 1.6581 Canadian Dollars on the spot at the time of writing, having opened the week at C$1.6580 thanks to the decent 1.18% gain made in the previous week.

Sterling was in the driving seat ahead of the weekend amidst reports that the EU and UK were likely to reach a breakthrough in talks before the end of the year which suggests near-term momentum lies with the Sterling side of the GBP/CAD equation.

Concerning technical outlook for the coming five days, our studies of the GBP/CAD exchange rate reveal a pair that is largely rangebound with price action encompassed by the 50 and 200-day moving averages at 1.6369 and 1.6671 respectively.

Given no particular bias either way, the range-bound market could be expected to continue oscillating sideways. Only a breakout above or below the range highs or lows would signal its discontinuation and a return to a trending market.

A bullish breakout from the range could be signalled by a move above 1.67 which would confirm a probable move up to a target at 1.68, composed of a major trend-line, and the late September highs.

A bearish breakout from the range would be signalled by a move below 1.6360, which would then probably lead to an extension down to a target at 1.6100, which roughly corresponds to the height of the range extrapolated lower, which is the usual technique for generating a target.

The Bullish Case for GBP/CAD

While near-term direction is constrained for now, taking a step back and looking at the longer-term picture reveals the Pound could be favoured to deliver gains for those who are patient. 

Shaun Osborne, strategist with Scotiabank, tells us he has noted a growing bullish potential in the GBP/CAD exchange rate of late, signified by a bullish inverse H&S formation developing around the Aug/Sep/Oct troughs.

An inverse head-and-shoulders pattern is formed when price action makes three troughs, with the middle trough the lowest (the 'head') and the troughs either side at about the same level (the 'shoulders').

The pattern is a signal that price will probably rise, but especially if they pass above the level of the neckline which is situated at the level of the two intervening peaks between the shoulders and the head.

On the chart of GBP/CAD, this is situated at the 1.68 level.

A break above the neckline would lead to a move of ten big figures (to 1.78) according to Osborne which is the amount calculated from the extrapolation of the height of the pattern higher, from the neckline.

The bullish longer-term case is supported by the location of a key reversal on the month chart in the month of September.

A key reversal is when prices make a new low and then rebound and close above the close of the previous bar; the more aggressive the rebound the stronger the reversal signal.

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CAD’s Week Ahead: Two Key Events on the Calendar

October 25 sees the release of the Bank of Canada’s latest interest rate announcement and Monetary Policy Report which will be key to whether the Canadian Dollar derives further strength.

Recall, the Canadian Dollar has derived much of its strength witnessed in 2017 from the Bank of Canada’s about-turn on interest rate policy; the Bank started the year coy on whether or not to raise interest rates but was actually raising rates by mid-year.

However, the shine on the Canadian Dollar’s rally has faded of late with the Bank expressing concern over the currency’s recent bout of strength which suggests further interest rate rises might be delayed if it were thought the CAD was too expensive.

A couple of key events will add to the evolution of this story.

First up, on October 16 is the release of the Bank of Canada’s Business Outlook Survey and Senior Loan Officer Survey on Monday, October 15.

The Business Outlook Survey is a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product. The Senior Loan Officer Survey collects information on the business-lending practices of Canadian financial institutions.

Analysts at TD Securities say the BOS will provide a key insight into the Bank's mindset ahead of the October MPR.

“After Poloz's most recent speech, we will be watchful for any mention of currency headwinds or greater concerns over trade protectionism. While we think the bar for an October hike remains high, evidence that firms' investment and employment outlooks remain solid despite ongoing uncertainty should allow the Bank to continue tightening policy in December,” say TD Securities in an economic preview note for the coming week.

Then on Friday, October 20 Canadian inflation data are released.

Headline CPI inflation is forecast to read at 0.3% on a month-on-month basis and 1.6% on an annualised basis.

A strong beat on these numbers would hint to markets that the Bank of Canada might be inclined to raise interest rates again in the near-future, therefore would be positive for CAD.

Also on Friday are the release of retail sales data where a reading of 0.5% is forecast.

Sterling's Week Ahead: From Politics to Data

Politics have been the key driver of Sterling this month - in the first week of October Prime Minister Theresa May’s position as leader of the country was put into doubt during the Conservative Party Conference and the second week saw the completion of the crucial fifth round of Brexit talks.

May survived and while no major breakthrough in Brexit talks have been reached, there are a number of hints that a breakthrough is likely before the turn of the year.

But the drivers of Pound Sterling are expected to move away from politics as we progress through mid-October.  

“Expect the narrative for GBP to slowly shift towards the November ‘Super Thursday’ Bank of England meeting,” says Viraj Patel, an analyst with ING Bank N.V. in London. “Here we see upside risks as the Bank are not only likely to hike by 25bp, but the risks are that Governor Carney signals that this is more than a ‘withdrawal of stimulus’ hiking cycle.”

At present markets are forecasting a 0.25% interest rate rise to be delivered in November, commensurate with the communications for such a move set out by the Bank of England and its officials at various points in September.

The Bank suggest an interest rate rise is needed to ensure inflation does not runaway - it is already closing in on the 3.0% level and is thus a full 1% above their mandated target level. By raising interest rates the Bank would be able to slow spending but higher rates also = a stronger Pound as foreign investors are attracted to increased yields in the UK.

Tuesday: Inflation Data, Bank of England's Carney to Appear before Parliament

The question being asked from the Pound’s perspective is whether further interest rate rises are likely beyond November. Much depends on the data out this week.

Inflation data is due on Tuesday, October 17 with headline CPI for September forecast to read at 3.0% on an annualised basis, up from 2.9% registered in the previous month. Monthly CPI is forecast to read at 0.3%, down from 0.6% seen previously.

If numbers come in above 3.0% this would indicate inflationary pressures in the economy are running above expectation and perhaps more than one Sterling-supportive interest rate rise is required in coming months.

The Bank of England is mandated with maintaining inflation as close to 2% as possible with the Monetary Policy Framework noting:

“If the target is missed by more than 1 percentage point on either side – i.e. if the annual rate of CPI inflation is more than 3% or less than 1% – the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.

This could therefore be the week that Governor Mark Carney gets his pen out and sends a letter to Chancellor Philip Hammond.

Such a move would be symbolic, but by raising interest rates in November the Bank will be seen to be taking concrete actions in dealing with rising inflation.

Of course, were inflation to read below the expected 3.0% marker, the Pound could come under  pressure this week, notable pressure if a big fall in inflation were reported.

Also on Tuesday, Carney himself will appear before members of Parliament’s Treasury Select Committee in which he will be grilled over recent policy decisions, and where he sees policy going over coming months.

“The session should provide clarity on how big a majority the MPC will have when it hikes rates in November as we expect – overly dovish tones from both could suggest a closer vote, but ultimately we think the BoE will hike,” says a note from TD Securities ahead of the event.

Wednesday: Watch Wage Data

But perhaps more important than inflation data itself, is data that tells us something about how inflation data will look in the future.

This is why labour market data from the Office for National Statistics on Wednesday, October 18 are key, and wage data specifically.

The average earnings index - with bonuses included - is forecast to rise 2.1%. A number greater than this would be seen as positive for the Pound as it would signal that domestic inflationary pressures are building. When pay packets increase, demand increases which in turn pushes up prices.

The Bank of England would view such a dynamic as evidence that further interest rate rises are required if inflation is to be contained. It also suggests a robust economy that can absorb one or two interest rate rises in coming months.

A beat of the 2.1% forecast by markets would therefore be good for the Pound, but a lower number would be negative for the currency.

Wage increases have been slow in coming as the productivity of the average UK worker remains constrained. The exact reason for this lack a lack of productivity is not yet fully understood, but only when we see strong increases in productivity will we likely see pay packets make jumps higher.  

“Surveys broadly indicate that employers remain on a hiring spree, with the employment component of the Services PMI at a 19-month high. Meanwhile, there are reports of salaries being bid up amid labour scarcity, with the REC Report on Jobs finding that permanent salaries had risen at the fastest pace since October 2015,” say analysts at Investec in a note to clients.

We would suggest markets will be pessimistic heading into this data release owing to data out last week from the ONS which showed UK labour productivity, as measured by output per hour, was estimated to have fallen by 0.1% from Quarter 1 (Jan to Mar) 2017 to Quarter 2 (Apr to June) 2017 while over a longer time-period, labour productivity growth has been lower on average than prior to the economic downturn.

A beat on expectations would likely be the more surprising outcome and therefore the impact on Sterling - to the upside - would be greater. So watch for a decent rally in Sterling were the data to beat.

Thursday: The Health of UK Shoppers

The week of data ends off with the release of UK retail sales which are a key indicator of consumer confidence.

Markets are forecasting monthly retail sales for September to read at -0.2%m down on the 1.0% seen in the previous month.

So expectations are low here and a beat would certainly give Sterling a lift into the latter half of the week.

Friday: Politics Still With us, Watch EU Leaders Summit

While data will be key readers should remember that the EU leaders’ Summit on October 20 where Heads of State of the European Union will gather to discuss progress made on Brexit thus far.

We already know that it will be agreed negotiations are not ready to move on to discussions of trade.

But we have also noted reports that the EU could be willing to move on to talks in the near future were May to offer up some concessions. The Pound rallied last week on the news as it suggests the EU and UK are actually closer together on outstanding issues than initially expected.

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