Pound-to-Canadian Dollar Rate Forecast For the Week Ahead
© COSPV, Adobe Stock
Our technical studies suggest more upside is expected from GBP/CAD as we have identified the formation of a persuasive chart pattern which heralds more upside for the pair.
The Pound-to-Canadian Dollar exchange rate had been rising up until the middle of January when it stalled and started going sideways.
Since then it has formed a boundaried range between the highs at 1.7650 and lows at 1.7300.
Our technical studies suggest the rally, followed by the sideways move looks like a pattern known as a 'bull flag', and this offers some interesting clues as to future price action.
Flag patterns normally break higher and are expected to move as far as the 'pole' part extrapolated higher from the base of the flag square, as shown in the diagram below:
(Image courtesy of dailyfx.com)
If GBP/CAD has indeed formed such a flag then it will probably break higher soon and move up as far as 1.8000 potentially.
A break above the range highs, confirmed by the exchange rate surpassing the 1.7667 highs would signal a continuation up to an initial target at the 1.7840 May highs.
Major highs can provide significant obstacles as they are often levels where supply increases due to traders, who betted wrongly on the market going higher just before the major high, liquidate their trades after holding onto their losing positions for a long period.
These traders are usually so relieved the market has rallied back up to their entry price that they would rather close their positions in order to breakeven than hold on in the hope the market will go higher again.
If the rally continues above the May highs, however, it could move all the way up to the next target at 1.8000, which is a major round-number and therefore a place where traders often close out their positions and take profit.
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Data and Events to Watch for the Canadian Dollar
The release of inflation data is probably the main event in the week ahead for the Canadian Dollar.
Inflation affects central bank policy and central banks invariably raise interest rates when inflation rises and vice versa when it falls.
Higher interest rates drive up the value of currencies by attracting larger capital inflows drawn by the promise of higher returns, so a higher-than-expected inflation print usually results in a rise in the currency - in this case, the Canadian Dollar.
January inflation data (CPI) is out at 13.30 GMT on Friday, February 23, and is forecast at 1.4% year-on-year (yoy) compared to 1.9% previously.
Month-on-month inflation is forecast to come out at 0.4% from -0.4% previously.
Core inflation currently stands at 1.2% and some forecasters have estimated it will remain at that level.
The other principle release for the Canadian Dollar is Retail Sales in December, which is out on Thursday, February 22, at 13.30 GMT, and is expected to show a 0.3% rise in December from 0.2% previously.
Over the last year, retail sales have risen 6.5% and a similar figure is expected in the December data.
Data and Events to Watch for the Pound
The Brexit related news will likely be the key driver of any big Sterling moves from a domestic perspective we believe.
"Faced with widespread criticism that the government’s plans for the next phase of Brexit talks are, at best, unclear, PM May and several ministers are set to deliver a series of speeches seeking to clarify the government’s position, demonstrate that the Cabinet is unified and provide some impetus to allow PM May to move forward with transitional phase talks with Brussels," says Victoria Clarke, an economist with Investec.
Clarke says we can expect a more substantial speech from May and other key Brexit ministers, probably following the planned gathering of the Cabinet at Chequers.
"For sterling and UK focused investors more broadly, that speech will be key in shaping sentiment amidst rapidly waning optimism that the UK will be able to reach a transitional arrangement deal over the coming weeks or even months," says Clarke.
© freshidea, Adobe Stock
Data-wise, in the week ahead December and January Unemployment data is the most significant release for the Pound.
Average earnings (ex-bonuses) for the three months to January are released on Wednesday, February 21, at 9.30 GMT and are forecast to show a 2.4% rise compared to the same 3-month period a year ago; earnings including bonuses are forecast to show a 2.5% rise.
A higher-than-expected result would put upside pressure on the Pound as it would signal to markets that the Bank of England is likely to raise interest rates by 0.25% in May, and perhaps even once more before 2018 is out.
Higher wages mean higher inflation as increased consumer demand bids prices in the economy higher, which in turn leads the Bank of England to raise interest rates. Higher interest rates tend to restrict spending growth as the cost of borrowing goes up but another side effect is a higher Sterling because higher rates tend to attract greater inflows of foreign capital as overseas investors are drawn by the promise of higher returns.
The unemployment rate in December is released at the same time and expected to remain unchanged at 4.3%.
If it drops it will be positive for the Pound as lower unemployment generally leads to higher wages as fewer job-hunters means there is less competition.
"One headwind for U.K. economic growth is that real disposable income growth weakened over the course of 2017," say analysts at Wells Fargo.
"That may be poised to change as the downward trend in the unemployment rate may eventually result in a pickup in disposable income," they continue, adding:
"That is the reason the financial market in the United Kingdom will be paying particularly close attention to the release of the latest unemployment figures on Wednesday of this coming week."
The second estimate of GDP in the last quarter of 2017 is out on Thursday at 9.30 and is forecast to slide to 1.5% compared to a year ago, from the first estimate's 1.7%.
On a quarterly basis, it is forecast to rise 0.5% from 0.4% previously.
If it falls markedly it would be negative for Sterling as lower growth generally lessens the likelihood the Bank of England will raise interest rates. It also lessens inflows from outside investors who tend to choose to put their money in fast-growing economies.
Business investment is a key gauge of confidence and growth in the economy.
Is is also extremely sensitive to Brexit politics as shown by the chart below, which shows a market slowdown post-referendum, as companies put big projects on ice until after clarification on the UK's new relationship with Europe.
The level of business investment in Q4 2017 will also be revealed in data out at the same time as GDP and is estimated to show continued growth of 0.5% quarter-on-quarter.
(image courtesy of tradingeconomics.com)
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.
