Pound-to-Canadian Dollar Exchange Rate's Technical Forecast, Events and Data to Watch in the Week Ahead

GBP/CAD charts are showing a tentative uptrend remaining in place but the exchange rate faces the UK budget and increasing nerves over NAFTA in the week ahead which could alter direction.

The Pound-to-Canadian Dollar exchange rate keeps making higher highs and higher lows, which in technical terms is indicative of an uptrend. Whilst the trend could not be said to be strong, it remains intact and could therefore advocate for further gains in Sterling over coming days.

As with all trends, the expectation is for them to continue until they reverse and therefore we are bullish - which means expecting more upside - the current trend.

However, given the messy look and feel of the chart, we would ideally wish to see a clear break above the 1.7174 highs for confirmation of more upside, to a target at 1.7300.

The forecast chimes with the analysis of Scotiabank FX Strategist Shaun Osborne, which we have mentioned before, and is bullish the pair due to a monthly key reversal in September (see below) and the possibility it could be forming an inverse head and shoulders at the lows.

Both of these are quite strong bullish reversal signals: the monthly key reversal occurs when a month makes a new low but then recovers strongly to close above the high of the previous month - as happened in September.

The inverse head and shoulders (H&S) is an upside-down version of the head and shoulders top, which occurs when price forms three trough lows, the centre one of which is the lowest and is the 'head' and the two either side of a similar depth representing the 'shoulders'.

The idea is that after this pattern has formed the price will rise strongly if it can break above the neckline joining the two intervening peaks of the pattern (see below).

The problem with the inverse H&S on GBP/CAD is that the exchange rate has already broken above the neckline, risen up and then rotated and fallen back down, which seems to indicate the pattern may have failed.

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Data and Events for the Canadian Dollar

The Canadian Dollar is still at risk of getting a raw deal from negotiations with the US and Mexico over the North Atlantic Free Trade Agreement (NAFTA).

The most recent tranche of talks is scheduled to end on Tuesday and there is a risk of a negative implication from those, impacting negatively on CAD (positive for GBP/CAD).

We reported last week that the issue of NAFT talks breaking down are potentially not being full appreciated by the market.

“Investors should protect themselves against NAFTA termination risk given the level of complacency in the USD/CAD market,” says Bipan Rai, a foreign exchange strategist at CIBC.

The big data event on the calendar for the Canadian Dollar over the next few days is the release of Canadian retail sales on Thursday, November 23 at 13.30 GMT.

The consensus expectation is that sales will have risen by 0.9% in September from -0.3% previously, and by 1.0% for core, from -0.7% previously.

TD Securities are positive, saying, "Volumes will likely come in below the nominal print but will still be supportive for industry-level GDP in September and provide momentum heading into Q4."

Data and Events to Watch for the Pound

The most significant event of the week ahead is the Autumn Budget statement on Wednesday, November 22 which will prove important in terms of the credibility of the UK Government, and the economy's potential growth trajectory.

From a currency perspective, the stability of Theresa May's Government is key; markets like stability and recent months have shown the Government to be anything but.

The budgets is often a 'danger time' for the Government as popular support has often proven to be attuned to the success of a budget - recall George Osborne's 'omni-shambles budget' of 2012 where support for the Cameron Government slipped notably on perceived policy blunders presented in that budget.

"It is critical not only for the Government’s self-imposed fiscal goals (2% deficit by 2021, balanced by mid-2020s) but the survival of May’s Govt. due to mounting political pressures domestically and around Brexit," says Tim Riddell at Westpac.

"A successful budget could relieve some pressures with a sound fiscal hand, support struggling parts of the population and strained public departments (NHS, education, security, et al,) and even allow for a firmer approach towards Brexit," says the analyst.

Also of importance to the Pound is whether the budget is growth-friendly or not - if it is, it could help strengthen the Pound.

There is a possibility the budget could include more generous public spending, especially on housing, and if so, this has the potential to boost the Pound.

Increased public spending tends to increase economic activity, which can generate growth, inflation, and then higher interest rates.

Higher interest rates tend to boost the Pound by attracting more capital inflows from foreign investors seeking somewhere to park their money where it will earn higher returns.

"The chancellor has come under increasing pressure to deliver a popular ‘big and bold’ budget that includes increased spending as a means of reviving spirits in the struggling and divided government," says a briefing from TD Securities.

The politics of Brexit could also continue to impact on Sterling as EU leaders are scheduled to meet to discuss whether progress in divorce proceedings has been sufficient to allow discussions to move on to the all-important future trade relationship.

"In the near term, UK politics will likely be the main driver of GBP. In fact, GBP’s reaction to UK politics and our Brexit stress tracker is rising again," says Yujiro Goto of the Global FX Strategy desk at Nomura.

Although the size of the divorce bill remains a key sticking point there are signs the two sides are moving closer to a middle ground following reports from EU council head Donald Tusk that he found recent discussion with Theresa May surprisingly positive.

Any announcement of an agreement or being close to an agreement on the divorce bill would be extremely positive for the Pound.

The main hard data release is public spending figures for October at 9.30 GMT on Tuesday, November 21.

Public Sector Net Borrowing which is the difference between what the government earns in revenue and what it spends is expected to rise to 6.6bn, however, recent results have generally undershot expectations and a lower-than-expected amount might support

Sterling marginally by providing the Chancellor with more room to manoeuvre in his budget on Thursday.

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