Pound-to-Canadian-Dollar Rate Week Ahead: "Vulnerable to a Break Lower"

-GBP/CAD poised to fall amid supportive environment for CAD.

-BoC to raise rates this week as market eyes latest UK GDP data. 

-Easing Brexit risks may offer Sterling some support, limiting losses.

© Goroden Kkoff, Adobe Stock

The Pound-to-Canadian-Dollar rate rose as the new trading week got underway Monday but the pair looks vulnerable to a break lower during the days ahead.

GBP/CAD has formed a large, very clearly defined, bearish Elliot wave lower since rolling over after the 1.7773 March 19 highs.

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

In their most basic form, Elliot waves define markets as composed of 5-wave cycles of buying and selling, growth and decay, separated by 3 wave corrections.

The current move down since March 19 fits the description of a classic 5-wave Elliot wave of selling, which is currently unfolding its final 5th wave lower.

Research shows that in the vast majority of cases wave 5 reaches at least as far as the bottom of wave 3, which in this case is situated at the 1.7058 lows. The market structure, therefore, suggests a continuation lower to an eventual target at those lows, or just above them at 1.71 for more certainty.

Nevertheless, there are significant impediments, chief of which is the 200-day moving average (MA) demarcating the lows of the recent short-term sideways range which began after the exchange rate bottomed at 1.7286, only last week, on July 02.

Assuming a break below the 200-day, however, and a confirmatory break below the 1.7286 lows we would forecast a continuation down to a minimum target of 1.71.

The 4hr chart below shows the more recent market structure in more detail and reveals a possible bearish flag pattern in evolution, adding further weight to the bearish prognosis.

Above: Pound-to-Canadian-Dollar rate shown at 4 hour intervals.

From a fundamental perspective, the main risk in the week ahead comes from the meeting of the Bank of Canada (BOC) which sets interest rates in Canada. If the BOC raises interest rates at the meeting as some guess may happen CAD will strengthen providing a catalyst for a break lower in GBP/CAD and possibly the fulfillment of the price objectives above.

Strong economic data, including excellent labour market data out on Friday, has increased the pressure on the BOC to raise rates so as to cool inflation yet against this lies a backdrop of trade war risk with the US which has so far played a major part in preventing the BOC from acting.

Even if the BOC does not raise rates this week, however, acknowledgment of increasing risks that they will in the near future may be enough to boost CAD anyway, and many analysts see the fundamental risks as tilted in the currency's favour in the week ahead.

One potential spoiler for the bearish view, however, could be an easing in Brexit risk which might support the Pound.

This comes after Prime Minister Theresa May gathered her cabinet together on Friday to hammer out a consensual vision for Brexit which they could all agree on and thus present a stronger more unified front. Her demand for a unified stance from a previously fractious cabinet could mark a turning point for the Brexit debate.

The new plan maintains a frictionless border with the EU but at the same time allows the UK to freelance its own trade deals overseas collecting tariffs on behalf of Brussels for goods arriving on English shores destined for the EU.

The plan appears to provide a compromise on most of the major previous sticking points but Brexiteer purists view it as Brexit 'in name alone' as it de facto keeps the UK in the common market whilst removing its right to a veto, and there are already rumblings of descent from euro-skeptic backbenchers.

Yet for financial markets, it is likely to be received as a sensible proposal and therefore better for the economy. If it gains traction and becomes a realistic solution the Pound should bounce back in the week ahead. The main determinant of whether the deal has longevity is the reaction of EU partners in Brussels, especially on the sticking point of freedom of movement.

Data and Events to Watch for the Pound 

The reaction of the EU to Theresa's new Brexit proposal, especially that of the EU's chief negotiator Michel Barnier, will be a key issue in the week ahead for Sterling, probably the most significant event, assuming a reaction is forthcoming.

"While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her 'soft Brexit' approach to the customs union internally, the real test is whether the EU is warm to their position," says John Kicklighter chief strategist at DailyFX.com.

Beyond that, however, it is a relatively quiet week for the Pound, with the most significant data industrial and manufacturing production, and trade data for May released on Tuesday, July 10 at 8.30 GMT.

Last week the pound was supported by strong Services PMI data for June which helped dispel fears of the Q1 slowdown extending into Q2 - the big question now is whether heavy industry experienced the same recovery and if it did it will probably support Sterling.

"A strong set of figures would almost certainly give the pound another leg up," says Rafi Bouyadjuidan, an analyst at retail broker, XM.com.

Yet not all analysts share his view:

"The manufacturing output is unlikely to alter the view of Sterling trapped in corrective mode against the US Dollar in the week ahead," counters Mario Blascak, an analyst at FXStreet.

The other main release for the Pound is the new monthly GDP estimate (for May) out at the same time as the other data on Tuesday.

Data and Events to Watch for the Canadian Dollar

As we have already mentioned above the BOC meeting for their July rate meeting on Wednesday, July 11 at 14.00 GMT, and they may raise interest rates, although doubts still remain.

"With relations between the US and Canada at a low point and the future of NAFTA looking uncertain, most investors had been expecting the Bank of Canada to wait for the tensions to diffuse before raising rates again. However, following recent hawkish remarks by the Bank’s Governor, Stephen Poloz, a July rate hike has moved back into the frame," says Rafi Bouyadjuidan, an analyst at XM.

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