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Canadian Dollar vs. Pound Week Ahead Forecast: Rebound Off the 1.66 Floor Paves the Way Higher

GBP/CAD outlook

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- GBP/CAD rebounds off 1.66 floor

- Short-term uptrend to potentially extend

- The main release for Sterling is GDP data

- CAD eyes a speech by the governor Poloz

The Pound-to-Canadian Dollar exchange rate trades at 1.7021 at the start of the new week, and appears to be drifting towards the upper end of the August-November range.

Short-term, Sterling has the momentum thanks to a strong lift enjoyed agaisnt the Canadian Dollar last week that takes it back well above the key 1.66 lows.

GBP/CAD rose back up to the 1.70 level on the back of reports the E.U. was willing to make compromises to get an agreement on the Irish border backstop, as well as signs of a possible trade deal for UK financial services after Brexit.

Concerning the week ahead, our technical studies signal a good possibility this young rally could extend given the exchange rate has now successfully broken back above the 50-day moving average (MA) at 1.6950, an event seen as a key 'right of passage' hurdle cleared for a young bullish trend in its life-cycle to maturity.

GBP to CAD daily graph

The pair is now marginally biased to continue rising, assuming it can break above the November 1 high at 1.7067.

Such a move would probably lead to an extension up to a target at the level of the October high at 1.7286.

The four-hour chart also supports a bullish outlook after forming a bull flag continuation pattern (see below).

GBP to CAD 4hour chart

This indicates that the next move will probably be higher with a break above the 1.7056 highs providing confirmation for an extension up to a target at 1.7286.

Bull flags often rise a similar distance as the length of their polls extrapolated higher, from the bottom of the consolidation of the 'flag-square'. This method of target measurement also indicates a potential target at around the 1.7286 highs.

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The Canadian Dollar: What to Watch

The main event for the Canadian Dollar in the week ahead is probably a speech by Bank of Canada's (BoC) governor Stephen Poloz to the UK Chamber of Commerce on Monday, at 13.10 GMT.

The key thing markets will be watching out for is whether Poloz touches on the BoC's stance on monetary policy. The interpretation adopted by markets from the most recent BoC policy decision is that a potentially aggressive path of interest rate rises are being lined up and should Poloz maintain such expectations the CAD could rally.

BoC guidance is currently a positive for the Canadian Dollar since higher interest rates, or the expectation of higher interest rates supports an appreciation of the currency because they attract greater inflows of foreign capital, drawn by the promise of higher returns.

However disappointing wage growth, which dipped below 2.0% according to the latest available data released on Friday, risks a change to the BoC's interest rate strategy and the central bank may opt for a gentler path to augmentation, to accommodate the slowdown in wage inflation.

That being said, on balance, it is unlikely that one labour market result is enough to impact on the BoC's strategy, and Poloz will probably simply repeat the relatively aggressive current forward guidance from the previous meeting.

Another important release for the Canadian Dollar in the week ahead is the Ivey PMI business sentiment survey, out on Wednesday, November 7, which is expected to show a rise from 50.4 to 50.9 in October.

A PMI result over 50 is indicative of an expanding economy and below of a contracting economy. The PMI is compiled from a survey of purchasing managers and their views on the outlook for their sector.

 

The Pound: What to Watch this Week

For Sterling, Brexit remains central to the outlook with the swinging in sentiment on whether or not a deal will be agreed by year-end being the main driver of the currency.

"Headlines on Brexit will intensify, but short of a material sign that negotiations are progressing (or that we are heading towards a ‘no deal’), they are unlikely to trigger a decisive directional shift in Sterling," says Daniel Been, Head of FX Research with ANZ Bank.

Data releases have however moved Sterling over recent days, but the moves tend to be short-lived in nature and therefore tend to be faded.

Nevertheless, there are some important numbers to watch.

Services PMI for October is another important release for the Pound in the week ahead. It is released on Monday at 9.30. It is forecast to slow to 53.3 from 53.9 previously.

The PMI numbers already released this week have been mixed with manufacturing PMI released Thursday disappointing while construction on Friday beat expectations.

The key release for the Pound in the week ahead is GDP data, out on Friday, November 9 at 9.30 GMT.

Month-on-month GDP is forecast to have only grown 0.1% while third quarter GDP is forecast to show a 1.5% rise on an annualised basis (1.2% previously) and a 0.6% rise on a quarterly basis (quarter-on-quarter) compared to 0.4% previously.

If growth accelerates as much as expected it may boost the Pound - if it beats expectations it could rise even more strongly.

Industrial and manufacturing production for October are out on Friday at 9.30 and forecast to show -0.1% and 0.1% changes in October on a monthly basis. While the data will be important we feel that from a Sterling perspective it will be overshadowed by the more timely monthly statistic.

Also on Friday are trade data with the balance forecast to reveal a deficit of £11.40BN in September.

Apart from this, there are also several housing metrics out including Halifax house prices at 8.30 on Wednesday and the RICS house price balance at 0.01 on Thursday.

The British Retail Consortium's retail sales monitor is often a good leading indicator for retail sales in general and it is forecast to show a 0.6% rise in October when released at 0.01 on Tuesday.

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