Pound vs. Canadian Dollar Week Ahead Forecast: End of the Rebound

- Technical studies suggest GBP/CAD might be turning lower after a good run

- Canadian employment data at the end of the week dominates CAD calendar

- Pound faces PMI data and important Brexit news this week

Image © Pavel Ignatov, Adobe Stock

The Pound-to-Canadian-Dollar exchange rate was quoted 0.15% higher at 1.7346 during the morning session Monday and is now up by 2.4% for the 2018 year to date.

The Pound fell sharply against Canada's Loonie at the end of the previous week as the latter strengthened in response to data suggesting the Bank of Canada is likely to forge ahead with an interest rate rise on July 11 and now some strategists say the exchange rate could cede further ground during the week ahead.

Canada's Dollar strengthened against the Pound, drawing a line under four consecutive weeks of losses after Statistics Canada data showed the Canadian economy growing faster than was expected in April, which marks the beginning of the second quarter, while Sterling remained under pressure from a strong US Dollar and weak appetite for the currency given an absence of progress in the Brexit negotiations.

The week ahead offers major economic data for both currencies, with markets looking for IHS Markit PMI surveys of the UK's manufacturing, construction and services sectors to highlight a resilient performance from the economy during June, while Canada's labour market is also seen remaining in robust condition. This combined with a unfavourable technical picture on the charts are expected to push the exchange rate lower during the week ahead.

"Weekly charts suggest a major bear reversal is unfolding this week (bearish engulfing line) which effectively draws a line under the Pound’s June rebound, we feel. Recall that price action last Friday effectively called a halt to the GBPCAD rally via a bearish “shooting star“ session," says Eric Theoret, an FX strategist at Scotiabank.

"We had expected limited weakness in the cross to keep the broader bounce alive but the slide this week and the combination of bearish daily and weekly price signals rather imply that broader downside risks are mounting again. We see support at 1.7305/10 and then (major) at 1.7118," adds the analyst.

Above: Scotiabank chart showing GBP/CAD technical analysis.

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Economic Data and Events to Watch for the Canadian Dollar

The week ahead begins in Canada with a public holiday and offers only labour market and trade data for markets to chew on during subsequent days but being so close to the July 11 Bank of Canada interest rate meeting, it will be an important point for the Canadian Dollar.

Friday's labour and trade data is important because financial markets, as well as BoC policymakers, are looking for signs the Canadian economy has recovered from a first-quarter slowdown and that businesses are weathering the uncertainty thrown up by the North American Free Trade Agreement negotiations.

There are no forecasts available at the time of writing but markets will scrutinise the unemployment, jobs growth and trade balance numbers closely when they are released at 15:00 London time on Friday.

The data will come just days away from the July Bank of Canada meeting in which markets are betting the Bank will decide to raise its interest rate for the fourth time in the last 12 months, taking the cash rate up to 1.5%.

Governor Stephen Poloz told reporters last week the BoC will not conduct monetary policy based on "rumours or speculation", suggesting it will not allow itself to be stymied from raising interest rates by speculation in the press and jitters in financial markets over President Donald Trump's trade policies.

Last week data showed Canada's economy grew by 0.1% during the April month when markets had been looking for it to stall, with consensus suggesting GDP growth of 0% during the period, which points toward an economy that is performing better than many economists had feared.

The Pound's Week Ahead: PMI Data and Brexit

The week has started on a decent note from an economics perspective with the first of the three PMI data releases beating expectations.

On Monday morning, the manufacturing PMI for June beat expectations by reading at 54.4 where economists had expected 54.1.

The data comes ahead of Tuesday's construction PMI numbers where economists are expecting a reading of 54.6 and Wednesday's services PMI where analysts are expecting a reading of 53.9. The services PMI will most likely have the bigger impact on Sterling as the sector accounts for over 80% of UK economic activity.

Markets are currently watching UK data within the context of what it means for a Bank of England interest rate rise at some point in 2018.

Of late, expectations for an August rate rise have firmed, and should they firm further we would expect the Pound to gather support.

However, the Pound's lacklustre performance, despite expectations for an interest rate rise, confirm the baggage of Brexit uncertainty remains an heavy burden to bear for the currency.

Again, markets are waiting for further clarity on the way forward, and hopes are building that the cabinet's outing to Chequers - the Prime Minister's country residence - at the end of the week to thrash out differences in opinion and finally settle the matter will yield some guidance.

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