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

© COSPV, Adobe Stock

The Pound is likely to continue pushing higher against the Canadian Dollar but a key step in the Brexit process at the end of the week could trip the UK currency.

The Pound-to-Canadian Dollar exchange rate has reinvigorated the uptrend with an unexpected surge higher which has led to it breaking above several key levels, such as the May 2017 highs and the 200-week moving average (MA).

These levels normally resist upside so the fact that it has been able to move so easily above them is a strong bullish sign.

Last week we thought it would go lower after it rolled over and formed a bearish shooting star candlestick but it recovered and broke back above the highs of a bearish pattern.

Above: The weekly chart of the GBP/CAD exchange rate

The failure of the shooting star and the strong gains seen last week, which took the form of a long green candlestick known as a marabuzo, are a strong bullish indicator in themselves, and we expect more upside to develop from here. 

A break above the 1.8300 highs leading to a continuation higher, to a target at 1.8500, which is a psychologically significant round-number and therefore likely to see increased selling pressure as more traders close their bullish bets and take profit.

Analyst Shaun Osborne with Scotiabank in Toronto adopts a similar view having studied the charts saying, at this point the weekly dip noted in the week prior "does not look fatal to the rally" and "the underlying trend higher looks well entrenched on the charts and well-supported by the trend oscillators."

Osborne says any dips in GBP/CAD "should be minor and we expect good support on weakness to the low/mid 1.81 area. Longer run technical look constructive."

Data and Events to Watch for the Canadian Dollar

The main releases for the Canadian Dollar in the week ahead are on Friday, March 23, when retail sales and inflation data are out.

Inflation data in February is out at 12.30 GMT and is forecast to show a 0.4% rise compared to 0.7% in the previous month of January.

Compared to the same time in the previous year, or year-on-year as it is known, inflation is forecast to show a rise of 2.1% compared to 1.7% in February 2017.

Higher-than-expected inflation is generally seen as supportive of currencies as it indicates the probability that interest rates will rise, and higher interest rates attract more foreign capital inflows drawn by the promise of higher returns, which increases demand for the host currency.

Retail sales in January, meanwhile, is also out at 12.30 and is expected to rise by 1.1% compared to -0.8% in December. Core retail sales (ex-autos) is forecast to increase by 0.9% from -1.1% previously.

A higher result, or higher than the expected result would be expected to lend support to CAD as it indicates inflationary pressures.

Data and Events to Watch for the Pound

It is a busy week for UK data with the highlight being the EU summit on March 22-23 which will determine whether the EU and UK will enter a two-year 'transition period' after the official Brexit deadline has passed in March 2019.

A transition period keeps trade settings between the EU and UK more or less unchanged and helps businesses avoid the spectre of a cliff-edge Brexit in 2019 which would see the trade relationship default to World Trade Organisation (WTO) rules and tariffs.

The Pound's fate in the coming weeks thus depends very much on whether a transition agreement can be approved.

"If negotiations do indeed proceed in line with the scheduled timetable, this should help to reassure investors that a final deal is indeed possible which should have some upside for the Pound," says a note from global investment bank Investec.

Markets are quietly confident a deal will indeed been reached based on the hints that have been coming through in recent days, Robin Walker - who serves as Parliamentary Under Secretary of State at the Department for Exiting the European Union - said in a speech at the Institute of Directors last week that "we recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time.”

“Both the prospect and the timing of a transitional deal on Brexit remain highly uncertain. If such a deal does take place, however, it could be an important positive development for Sterling in the near-term by reducing 'cliff-edge' risks," says Lefteris Farmakis, an FX strategist at UBS Group.

However, the issue of the Irish border remains a thorny issue that has long appeared to be at an impasse, and it could yet come to deliver disappointment so nerves will remain elevated.

The other major event for the Pound is the Bank of England (BOE) rate meeting on Thursday at 12.00 GMT.
Although no-change in policy is expected analysts will be carefully combing the meeting minutes, released after the meeting, for signs of which way the monetary policy committee (MPC) appears to be swaying when it comes to future policy.

At the previous meeting, the BOE said they thought markets were underestimating how close the BOE was to increasing interest rates and analysts will be watching for whether this is still the case, according to Nordea Bank's chief analyst Martin Enlund et al.

Much depends on whether the BOE decides to keep the new phrase introduced in its last policy statement that, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period."

If the phrase is kept in then it would indicate a greater urgency to raise interest rates than currently expected and result in upside for the Pound.

Higher interest rates are generally bullish for a currency as they increase inflows of foreign capital drawn by the promise of higher returns.

Another major release in the week ahead for the Pound is inflation data out on 9.30 on Tuesday, and this is forecast to show a slow-down in the rate of inflation to 2.8% year-on-year in February, i.e compared to a year ago, from 3.0% in the previous month.

On a monthly basis, it is forecast to show a 0.5% rise from a -0.5% in the previous month of January.

Normally high inflation stimulates currency appreciation because it suggests interest rates will rise, especially if it is caused by stronger growth, but because UK inflation has been caused predominantly by the weak Pound increasing the price of imports rather than growth, the relationship is a little more complex and the Pound may act unpredictably after the release.

Wednesday sees the release of UK labour market data which could also impact on the Pound - if labour data is positive, especially wage data, it is likely to strengthen Sterling.

Average Earnings are forecast to rise to 2.6% in January from 2.5% in December - both including and excluding bonuses - and if this occurs it could provide an impetus to the Pound.

The unemployment rate is forecast to stay unchanged at 4.4% and employment change to show that an extra 85k more jobs were added to the economy when the data is released at 9.30 on Wednesday morning.

Thursday sees the release of another potentially market-moving release in the form of Retail Sales, which is forecast to show a 1.5% rise yoy in February from 1.6% previously and 0.4% month-on-month from 0.1% in January.

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.