Risk of GBP/CAD Breakdown Increases After Bank of Canada Rate Hike Chances Pass 80%

- GBP/CAD at risk of a breakdown due to central bank action

- Price charts also signal bearish bias as Elliot wave pattern points to 1.70s

Above: Bank of Canada Governor Stephen Poloz is expected to raise interest rates this week. Image © Bank of Canada, Reproduced Under CC Licensing

The risk of a breakdown in the Pound-to-Canadian Dollar exchange rate has increased due to a rising chance of the Bank of Canada (BOC) raising interest rates on Wednesday, after the probability of such a move increased to above 80% as implied by global money markets.

Higher interest rates normally strengthen a currency as they increase inflows of foreign capital attracted by the higher rates and the promise of greater returns.

"Stephen Poloz can’t hold off raising interest rates any longer," says Theophilos Argitis, a reporter at Bloomberg.

"Of 18 economists surveyed by Bloomberg News, 14 are expecting the Bank of Canada to raise its benchmark rate by a quarter point this week to 1.5 percent. Market pricing is in line, with investors placing odds of more than 80 percent on a hike at Wednesday’s decision, which includes a fresh economic forecast and press conference," he adds.

The news combined with the bearish GBP/CAD chart increases the chances of a break lower.

The pair appears to be in a broad cyclical downtrend which our studies suggest is likely to descend all the way down to the May lows at 1.7058.

The pair seems to be unfolding a 5-wave Elliot wave cycle lower with the market currently midway through wave 5. Wave 5 almost always reaches the end of wave 3 (see pic below).

The structure of the market near-term is also bearish. The pair fell sharply from the June 22 highs and then plateaued and since then has continued sideways. The 'L' shape it has thus formed is usually indicative of a pause in the middle of a downtrend, with an eventual break lower than expected.

A major chart obstacle, however, still stands in the way of further downside, which is the 200-day MA, which has been holding up prices ever since they found a floor at the end of June.

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