Pound-to-Canadian-Dollar Rate 5-Day Forecast: New Lows in Sight After Key Level Gives Way

- GBP/CAD pushes below 200-day moving average.

- Next move down could take exchange rate to mid 1.70s.

- Brexit main driver for Pound, Wholesale trade for the CAD. 

© Pavel Ignatov, Adobe Stock

The GBP/CAD rate broke lower following strong retail sales and inflation data at the end of last week, with bears finally managing to pierce below the stubborn 200-day moving average, and the pair looks vulnerable to further losses in the short term.

The pair is now probably on its way lower to the May 30 lows at 1.7055, assuming our interpretation of the Elliot Wave patterning of the move since the March highs is accurate.

Above: GBP/CAD rate shown at daily intervals.

Currently the market is in the middle of wave 5 of a larger wave that began at the March highs. Wave 5 normally reaches at least as far as the bottom of wave 3, which is the May lows. This suggests a move down to 1.7055.

We may well be in the smaller wave of the wave 5 given that the recent consolidation above the 200-day moving average may well have been a smaller wave four of 5.

Elliot Waves are cycles of buying and selling, of rising and falling prices, which are composed of 5 waves numbered 1-5, or labeled using Roman numerals, as in I, II, III, IV, and V.

Waves 1,3 and 5 move in the direction of the dominant trend whilst 2 and 4 represent corrections. Wave 3 is almost always the longest and the strongest wave.

Above: Elliot Wave concept.

After a 5-wave pattern has finished the market corrects back in a shallower counter-trend move labeled A,B, and C.

Elliot waves are each composed of five smaller and are themselves components of larger 5-wave patterns. The MACD on a special 5,31,5 setting has been found to help identify which wave the market is currently trading in.

The MACD always troughs most deeply when wave 3 is bottoming as in the case with GBP/CAD above. Wave 4 can be identified as ending when the MACD has moved above the zero-line and wave 5 can be identified when the market forms a new but shallower trough compared to wave 3.

The MACD suggests wave (5) of 5 is unfolding. Our view that the exchange rate may fall to the May lows is supported by analysis from Scotiabank, a Canadian lender.

"Bear trend momentum is aligned negatively on the intraday and daily studies, however, and the weekly DMI signal is poised to shift bearishly for the GBP. A low close on the week—a close below 1.7290 might be enough—should add to bearish pressure on the cross in the near-to-medium term. We continue to look for GBP weakness to extend to the 1.7000/50 area," says Shaun Osborne, chief FX strategist at Scotiabank.

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What's on the Calendar for the Pound this Week?

Canadian data smashed expectations last Friday, when retail sales and inflation both came out above what economists had been forecasting.

The outsized gains helped support the decision of the Bank of Canada (BOC) to raise interest rates to 1.50% and could suggest further increases are on the horizon, which would be bullish for CAD.

In the week ahead there the most important release is wholesale sales on Monday, which is forecast to show a 0.3% rise (mom) in June versus the 0.1% previous result, when released at 12.30 GMT on Monday, July 22.

What is more likely to move the CAD in the week ahead is trade war rhetoric which tends to weaken commodity currencies disproportionately more.

What's on the Calendar for the Pound this Week?

The bearish prognosis painted thus far is based on our technical studies which aim to cut out the noise posed by economic data, politics etc.

Of course, the picture is significantly more complicated than this and in our opinion there could be some relief for the Pound as market focus shifts to 1) Bank of England interest rate pricing and 2) thinning Brexit-related headlines.

The week ahead for UK data kicks off on Monday with a speech from Deputy Governor of the Bank of England Ben Broadbent to the Society of Professional Economists in London at 18:00 GMT.

Analysts will be listening out for any comments in relation to Broadbent's stance on hiking rates in August. Current probabilities favour a hike from 0.25% to 0.75%.

The Confederation of British Industry (CBI) Industrial Trends Survey is released at 11.00 GMT on Tuesday, July 24, and is forecast to come out at 10 from 13 previously.

The result is the balance between positive and negative survey answers. Data from the CBI often gives a timely indication of economic trends and is closely watched by the market.

Mortgage Approvals are due for release on Wednesday at 9.30 and forecast to show a rise of 39k in June from 39.4k in the previous month of May.

Friday sees the release of Nationwide Housing Prices in July, which are expected to show a 0.5% rise from June and a 2.0% rise since July 2017.

The other main driver of the Pound in the week ahead will be the ongoing debate over Brexit.

Sterling weakened last week as fears resurfaced of a hard Brexit following Brussels's mixed response to Theresa May's Chequer's proposal, which itself was a hard-won compromise.

EU Chief negotiator, Michel Barnier was overall positive about the plan which he said had elements that were "very useful" however he was concerned it undermined the "integrity of the European Union" as a free trade region.

The reaction was seen by many as a sign the EU would want further compromises.

Given the negative response from many Brexiteers over the current proposals, further compromises are seen as unrealistic, hence markets starting to price in a 'no deal' Brexit which is ultimately reflected in a weaker Pound.

Barnier's most recent comments on the nature of the border with Ireland did show some signs the EU was willing to be flexible on its previous backstop solution.

The EU's backstop has been seen as unacceptable to Ulster Unionists, Theresa May's allies in parliament, who demand Northern Ireland and the rest of the UK remain intact after Brexit, and to the wider Conservative party.

There was something of a breakthrough on Friday following the EU General Affairs Council meeting when Barnier said the EU was in fact willing to search for a compromise on the question of the Irish border and revise its backstop.

A possibility of a no-deal has weighed on the Pound since the referendum and risks pushing the currency even lower in the week ahead. Likewise, relief is possible too, especially if Theresa May's proposal gains favour in Brussels.

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