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Pound-to-Canadian Dollar Rate in the Week Ahead: Trading Within Box Pattern

Canadian Dollar

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- Canadian Dollar stuck in range - could break either way

- Downside break would be very bearish sign

- Pound Sterling awaits government's 'Plan B' for Brexit

- Canadian Dollar eyes retail sales

The Pound-to-Canadian Dollar rate starts the week trading at 1.7073 - little changed from the week before. A marginal gain of 0.15% was put down to easing Brexit fears.

Sterling would have gained more if it had not been for the recovery in Canadian inflation data which supported CAD despite gains being put down to a change in methodology.

GBP to CAD monthly

Over the last two years, GBP/CAD has been rising in an ascending channel which remains intact and gives the long-term chart a mildly bullish look and feel.

GBP to CAD weekly

The weekly chart shows how the pair has formed a box pattern at the base of the ascending channel.

Eventually, the pair will have to break out of this box - or range - and when it does it will probably be with a high degree of volatility.

GBP to CAD daily 

There is no obvious indication of which way the pair will break. There has already been a ‘false break’ higher. I that break’s highs at 1.7505 are breached it will confirm a continuation higher.

A break below the 1.6600 lows, on the other hand, would give a strong green-light for bears as it would also coincidentally confirm a breakout from the two-year ascending channel.

An upside break would likely to reach a target at 1.7625; a downside break a target of 1.6200 initially, although deeper declines are also probable given the breakout from the channel.

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The Canadian Dollar: What to Watch

The main data release for the Canadian Dollar in the week ahead is retail sales, out on Wednesday, January 23, at 13.30 GMT, which is forecast to show a -0.6% fall for headline, and -0.5% in core sales, in December.

More than usual attention may be focused on the result. A weak oil market has hit growth at the end of 2018 and analysts will be keen to see whether other parts of the economy such as consumer spending can make up the difference.

“In its latest Monetary Policy Report the Bank of Canada projected a temporary slowing in growth as lower oil prices depress investment and output and, in that context, consumer spending and retail sales will be monitored in the months ahead as to whether they can offer a source of relative stability,” says a note from Wells Fargo.

Another key release is manufacturing sales out on Tuesday at 10.00, which is forecast to show a -0.6% fall in December, month-on-month after a lesser -0.1% decline in November.

The Bank of Canada (BOC) recently changed its forward guidance on interest rates, saying it was not necessarily planning any further interest rate hikes in 2019. This led to a sharp sell-off in CAD.

Emerging data will be critical in deciding whether the BOC retains this neutral view or starts hiking again because it sees evidence of the economy growing.

Higher interest rates tend to be supportive of the local currency because they attract and keep greater inflows of foreign capital, drawn by the promise of higher returns.

The Pound: What to Watch

The main factor influencing the Pound in the week ahead will be the next instalment of the Brexit saga. On Monday a motion will be put to Parliament which, if voted through, would ‘express the will of Parliament against 'no deal’.

"MPs will tomorrow unveil their plan to hijack the agenda of the Commons to suspend article 50, the mechanism by which the UK is leaving the EU," reports The Sunday Times.

Any motions aimed at preventing a no-deal Brexit are tipped to have a good chance of being voted through since it is the only option which appears to be supported by a majority of MP’s. If it is passed, it will further reduce the probability of a disorderly hard-Brexit and support the Pound further.

The Sunday Times meanwhile reports the Prime Minister Theresa May will meanwhile likely disclose her 'plan B' option aimed at salvaging her Brexit deal.

"She wants to offer a bilateral treaty to Ireland that would remove the hated “backstop” from the EU withdrawal treaty and prevent a hard border by other means," says Tim Shipman, Political Editor at The Sunday Times.

On the 'hard data' front, the main release is labour market data on Tuesday at 9.30 GMT. The consensus forecast is for 20k jobs to be added in December, for the unemployment rate to remain at 4.1% in November, and for average earnings (including bonuses) to rise 3.3% compared to a year ago, also in November.

A higher-than-expected result would support Sterling. UK data has been mixed recently. Last Friday the Pound floundered after UK retail sales showed an unexpected decline of -0.9% in December, which was below the -0.8% expected, and there is a risk that more data misses will build a picture if decline which further weighs on Sterling.

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