Pound-to-Canadian Dollar Rate Forecast for the Week Ahead

© Andrey Popov, Adobe Stock

Our technical studies suggest GBP/CAD looks vulnerable to a bearish reversal over coming days.

The Pound rose against the Canadian Dollar last week, in line with the forecast we made in our previous week-ahead publication where we identified the exchange rate as having formed a high-probability bullish continuation pattern.

It eventually met our target at 1.8000 and reached the 200-week moving average (MA) before peaking at 1.8040 and forming a bearish-looking shooting star pattern. 

Shooting stars are Japanese candlestick patterns which occur at market tops and indicate a bearish reversal in the trend, although they are only short-term indicators.

Since then the pair has fallen to a weekly close of 1.7730.

The four-four chart is showing a step decline lower which is composed of two sets of lower highs and lower lows. This suggests the short-term trend is down now, and likely to extend.

A break below the 1.7710 level would probably confirm a continuation of this bearish trend down to a target at 1.7610 at the 200-four-hour MA and the key March 01 lows.

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Data and Events to Watch for the Canadian Dollar

The main event for the Canadian Dollar (Loonie) in the week ahead is a speech by the governor of the Bank of Canada (BOC) Steven Poloz on Tuesday, March 13 at 15.30 GMT.

The BOC governor was cautious following the BOC's interest rate meeting last Wednesday when the committee decided to keep interest rates unchanged at 1.25%, despite widespread speculation of another 0.25% rise, due to a strong labour market and economic growth.

The main reason for the BOC withholding a hike was fears over the economic impact of NAFTA renegotiation talks, with particular fears that the US may leave NAFTA and start putting tariffs on its trade with neighbours.

Concerns in this area may have eased since then, however, due to the US announcing it would keep Canada and Mexico exempt from steel and aluminum tariffs.

The news leads to a noticeable recovery in the Loonie. leading to the sell-off in GBP/CAD at the end of last week which caused the formation of the shooting-star pattern on the weekly chart.

The market will be closely scrutinizing Poloz's speech, therefore, for signs the BOC's stance may have changed and any signals that it could be eyeing another rate hike now risks may have been percieved as easing, is likely to boost the CAD - however, given NAFTA negotiations are far from complete a full-on rally seems highly likely at this point.

Data and Events to Watch for the Pound

The main event for the Pound in the week ahead is probably the Chancellors’ Spring Statement, this is a new initiative brought in by Philip Hammond to provide an update on the economic and fiscal outlook.

No changes to the budget are expected and the statement is only scheduled to last 15-20mins, according to media reports, which is only a rump compared to the Autumn statement.

Budget's do not often move currencies so the Pound may not react, however, alongside the statement are revised forecasts from the Office of Budgetary Responsibility (OBR) which if substantially altered may impact on growth prospects and therefore Sterling.

The OBR has, on balance, been overly pessimistic in the past, generally undershooting with its forecasts and leading some commentators to expect it to revise up its forecasts on Tuesday.

"It is always difficult to predict other institutions’ forecasts. However in terms of the Spring Statement, we would expect the GDP growth projections to be a little more upbeat," says Ryan Djajasaputra, an analyst at Investec.

The OBR's most recent forecasts are contained in the table below.

For the sake of context, Investec's own house forecasts is for GDP growth of 1.7% in each year.

The other main event is the Bank of England's (BOE) Financial Policy Committee (FPC) meeting on Monday (statement published Friday 16) to discuss possible changes to capital buffers, introduced after the financial crisis under the Basel 3 regulatory framework.
The focus will be on whether the BOE reviews the size of the "Counter Cyclical Capital Buffer" (CCYB), a piece of regulation which guards against excessive bank-lending during upturns and excessive parsimony during downturns - thus the "counter-cyclical" sobriquet.

In November it was raised to 1%, with the FPC also indicating that it could be increased further in H1 2018 - so there is a possibility of a change at the meeting.

Again, this is unlikely to hit FX markets in any major way, and even if it does the impact may be difficult to gauge beforehand.

The CCYB impacts on the supply of credit, and therefore on inflation and growth, which in turn influence currency value, and it will probably form a part of the bigger picture that currency analysts consider in relation to their forecasts.

Generally increases in the supply of credit are seen as inflationary and likely to increase interest rates, which in turn leads to capital accumulation and a stronger currency.

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.