Pound-to-Canadian Dollar Could See Some Big Moves This Week, Here Are The Details

A cocktail of bullish chart patterns and an eagerly awaited Bank of Canada (BOC) rate announcement could lead to some big moves for the Pound-to-Canadian Dollar rate this week.

GBP/CAD looks like it is forming a bullish inverse head and shoulders pattern on the daily chart, which would suggest the price has bottomed.

This is an upside-down version of the classic head and shoulders (H&S) top pattern.

Instead of forming the outline of a head at the peak in the middle, and shoulders from the peaks either side, the inverse of the pattern forms a series of three trough lows with the central low being deeper (the head) than the two shallower troughs either side (shoulders) that are both at similar depths.

The inverse H&S has a neckline drawn at the level of the two intervening peaks of the pattern (see chart).

The price must break above this level for the pattern to be validated and for an upside target to be generated.

On GBP/CAD, the neckline is situated at 1.6830, however, there is a complication caused by the close proximity of a major multi-month trendline.

This adds a further obstacle to bulls and will make it more difficult for the exchange rate to break higher, as the trendline could attract a lot of selling pressure from bears seeking to capitalise on the expected first-touch rejection.

Therefore, we look for a break above 1.69 for confirmation of a further move higher, with an upside target then initially situated at 1.7500, due to support and resistance from previous highs.

However, the exchange rate may eventually go even higher given the inverse H&S generates a target that is the same height as the original pattern at its highest (A), extrapolated again from the neckline (B). This still-valid target is set much higher, at 1.7795.

Our analysis is supported by views from other technical strategists, such as Scotiabank's chief FX Strategist Shaun Osborne, who notes the same inverse H&S pattern.

Osborne is long-term bullish for other reasons too, including the "bullish key month reversal that developed in September.”

Osborne’s recommendation is, “monitor for now, but we look for opportunities to buy GBP weakness."

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Data, and Events that Could Move the Canadian Dollar

The CAD-bearish patterns on the price chart reflect increasing negative economic fundamentals - as of course, they should.

The formation of the aforementioned bullish bottoming pattern may not simply be a coincidence as in the coming week present ample opportunity for further weakness, especially for the Canadian Dollar, due to the meeting of the Bank of Canada on Wednesday at 15.00 BST.

Although widely expected to keep rates unchanged the main focus will be on the statement, which analysts are suggesting could be dovish (which means in favour of cutting rates).  

The Canadian Dollar weakened substantially on Friday after the release of economic data showed a steep slowdown in Retail Sales from 0.5% to -0.7%, whilst inflation data undershot too, coming out at 0.2% when the market had expected 0.3%.

And proceeding immediately after such a poor clutch of figures, it is quite possible that the central bank may decide to completely drop its tightening bias, most probably adopting a more neutral middle ground instead.

Canadian based investment bank TD Securities remind us, however, that not all recent data has been poor:

"Constructive data, from business sentiment and housing to wages and core inflation—call for the data-dependent central bank to present a more upbeat message than in previous communications," they say.

Poloz's recent statement in which he adopted a neutral tone cautions us to expect too upbeat a message.  

"In light of Poloz's defiantly neutral tone of late, the risk of a major dovish repricing in rate hike expectations is nontrivial," say TD Securities.

Data, and Events that Could Move the the Pound

Politics will still figure highly for Sterling in the week ahead.

Whilst the EU decided at their summit last week that not enough progress had been made to move to phase 2 discussions on trade, there was a silver lining in the form of EU Council President Donald Tusk who was optimistic about a deal.

Tusk said he thought descriptions of talks as being at "deadlock" were exaggerated, that the EU would start internal preparations for phase 2 as a concession to the UK, and that he hoped the second phase would begin in December when the EU will have another summit to decide whether to go ahead with phase 2.

The Pound recovered on Tusk's more optimistic comments after having sold off almost all week, and we think there is a chance of a 'Tusk bump' on Monday as the market starts to see a light at the end of the Brexit tunnel.

Tusk’s optimistic tone regarding Brexit was mirrored by the leader of Europe’s largest economy; Germany’s Angela Merkel suggested much of the gloom and angst surrounding Brexit is a function of British media coverage.

Merkel’s view is that talks are certainly not in deadlock.

We agree that media and markets are prone to focussing on the negatives at the expense of the more optimistic elements of talks. A classic example is the fixation with EU lead negotiator Michel Barnier’s use of the word ‘deadlock’ following the fifth round of talks. Barnier did also say he believed a breakthrough was still likely before year-end.

The Pound was sold and newsprint almost focussed purely on the negative, this leaves the Pound relatively oversold and prone to upside corrections when reality dawns.

The main hard data release for the Pound will come in the form of the first release for third quarter GDP, out at 9.30 BST on Wednesday, October 25.

The consensus estimate is for GDP to grow at 0.3%, but the result could make the difference between whether the Bank of England (BOE) hikes rates or not in November.

"PMI data suggest the GDP numbers will show another lacklustre 0.3% expansion in the three months to September, matching the performance seen in the first half of the year. Even such a modest GDP expansion would be unlikely to change the views of the hawks on the Monetary Policy Committee, but a weaker number could lead to rates remaining on hold at the November meeting. A stronger number would be seen by many as sealing the deal on a hike," says Bernard Aw, Principle Economist at IHS Markit.

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