Pound-to-Canadian Dollar Rate Forecast for the Week Ahead
The Pound's strong uptrend against the Canadian Dollar is forecast to extend in the week ahead according to our latest studies.
The Pound-to-Canadian Dollar exchange rate is pulling back within a broader medium-term uptrend, which is expected to resume eventually and continue climbing.
Although the last two days have been red down-days the pair formed a compelling three-bar continuation pattern just prior to the pull-back (see below bordered in blue) which is quite a strong sign the pair will move substantially higher:
The ADX indicator in the bottom pane is also at a level commensurate with a continuation scenario - at 30 it is basically neither too high (ie over 35) or too low (ie below 20).
ADX measures how strongly trending an asset is. When it is too high it is a sign the trend may be overextended and when too low a sign the pair is in a sideways consolidation, so just in between is ideal to signal a continuation
The pair has fallen for the last two days, but research shows that the trend often resumes after a two-day pull-back - suggesting a recovery may start on Monday when there is a higher probability of an up-day forming than a down-day.
For confirmation of a continuation higher, however, we would ideally wish to see a breakout above the recent 1.7643 highs, which would signal an extension up to 1.7835, just below the May 2017 key highs, where the pair will probably attract more selling interest pushing it back down.
However, analyst Shaun Osborne with Scotiabank takes a different view, he believes the Pound's recent uptrend against the Canadian Dollar is turning.
"GBP/CAD is weak, retreating from Thursday’s 8 month high and threatening a push back toward Wednesday’s open under 1.7400. DMI’s are suggestive of a shift in the balance of risk and momentum indicators are fading from overbought levels. GBPCAD appears vulnerable, with risk to 1.7250," says Osborne in a briefing to clients.
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Data and Events for the Canadian Dollar
The main release in the week ahead for the Canadian Dollar is the GDP data for November, which is out at 13.30 GMT on Wednesday, January 31.
The consensus expectation is for growth to rise by 0.4% from 0.0% in October - and higher growth is positive for CAD, as it increases the chances the Bank of Canada (BOC) will continue raising interest rates, and higher rates lead to greater inflows of capital due to the pull of greater returns, thus strengthening the currency.
Any disappointment in the release could therefore weigh on the Canadian Dollar in that it diminishes expectations for further rate rises at the BoC.
Data and Events to Watch for the Pound
The main data release in the week ahead for the Pound is survey data for Manufacturing and Construction in January, in the form of Markit IHS's purchasing manager indices (PMIs).
These are normally a reliable forward indicator of activity and trends within the broader economy and economists use them to predict growth. Markets will be looking for confirmation that the better-than-forecast economic momentum enjoyed by the UK economy in the final quarter of 2017, confirmed in last week's GDP data, has extended into the new year.
Manufacturing PMI is out at 9.30 GMT on Thursday, February 1 and is expected to rise to 56.5 from 56.3 previously.
Global investment bank TD Securities say economists are being too optimistic about Manufacturing and the index will fall to 55.9 instead of rising to 56.5; an outcome that would certainly weigh on the Pound we believe.
"We’re looking for a modest pullback in the manufacturing PMI after last month’s larger nearly 2pt decline, with the index falling from 56.3 to 55.9 in January. We expect to see some of the weakness in the flash Eurozone print reflected in the UK outcome," said TD Securities in a briefing to clients ahead of the new week.
Construction PMI is out at the same time on the following day and is forecast to fall to 52.0 from 52.2 in December. Note that the sector is in recession, according to official GDP data, so some recovery will be keenly anticipated. However, construction is a small component of the UK economy and the impact on Sterling will likely be small if any. Nevertheless, clues on longer-term prospects for the economy will be key to overall sentiment.
One further event of interest to Pound-watchers in the week ahead is Bank of England (BOE) governor Mark Carney's testimony to the Lord's Economic Affairs Committee at which he will have the opportunity to comment on the state of the economy and monetary policy before the 'black-out' period prior to the next official BoE rate meeting.
Markets are keen to ascertain whether or not the Bank of England will raise interest rates in 2018, in a follow up to 2017's rate rise. Markets are anticipating this is the case, but a bullish assessment by Carney could certainly be the catalyst to a higher Sterling in the coming week we believe.
Carney's appearance in Davos last week was striking in that he hinted that he is taking a more optimistic stance on the UK economy, seeing growth picking up sharply towards the end of the year as the UK "consciously recouples" with the accelerating global economy.
He will certainly be queried on this, and the answers will be closely followed by currency traders.
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