The Pound-to-Canadian-Dollar Rate in the Week Ahead: Mid-range with a Neutral Outlook

Image © Viv Idrange, Adobe Stock

- GBPCAD cedes ground but remains within established range.

- Clear break higher or lower required for directional bias to emerge.

- Wage data to drive Pound Sterling as CAD eyes oil and Poloz. 

The Pound-to-Canadian Dollar rate is trading at 1.7075 at the start of the new week after falling -0.65% in the previous week’s trading, and looks poised for another period of range- bound trading ahead. 

Sterling's weakness, after the government was defeated in another Brexit vote, helped push the pair lower. A rally in the price of crude oil also helped the Canadian Dollar, offsetting fears about a slowdown in its biggest trading partner, the U.S.  

Above: GBP/CAD rate shown at weekly intervals.

The technical outlook continues to be neutral for the pair, which is still trading in a long-term sideways range between roughly 1.75 and 1.68.

GBP/CAD is currently right in the centre of that range and given it's usually very difficult to forecast sideways trending markets our technical stance is neutral.

Above: GBP/CAD rate shown at daily intervals.

A breakout higher or lower would alter the outlook and suggest an extension to a target generated by the breakout move - normally calculated as 61.8% of the height of the range.

A break above 1.7625 would confirm a breakout higher to a target at 1.8050 a move below 1.6775 would probably confirm a bearish move to a downside target somewhere around 1.6325.

The pair has successfully broken below the 50 and 200-day moving-averages, which is a bearish sign but since this happened in a range-bound market the break is less significant.

The Canadian Dollar: What to Watch

The two main fundamental drivers for the Canadian Dollar (otherwise known as the Loonie) are likely to be the price of Canadian Crude oil and the outlook for the U.S. economy due to its close proximity and importance as a trading neighbour.

Above: Canadian crude oil index price performance. Source: Oilprice.com.

Last week the Canadian Crude oil index rose from $38.53 to $42.29 and this probably supported the currency since higher prices increase demand for the Loonie. Further gains in crude would be an equally positive influence in the week ahead.

The release of poor retail sales data for December in the U.S. increased concerns about a neighbouring economy, fubbing off negatively for CAD. The damage was somewhat reversed, however, after indications the March 1 tariff deadline on Chinese imports would be delayed by another 90 days.

Government shutdown fears were allayed after the president’s decision to divert some of the defense budget to the building of the border wall with Mexico resolved the crisis with Democrats in Congress.

Purely on the Canadian domestic front, a speech by Bank of Canada (BOC) governor Poloz on Thursday at 17.50 GMT is likely to be the main event for the Loonie.

Official data shows that the Canadian economy has slowed down in the final quarter of 2018 and that this has led the BOC to adopt a wait-and-see, data dependent stance, from the previously very hawkish stance.

BOC governor Poloz is expected to reiterate this broadly neutral policy orientation during his speech on Thursday but if he lurches in either a pessimistic or optimistic direction it could impact on CAD since the currency is closely correlated to interest rates.

Retail sales on Thursday at 13.30 is another important release for the Loonie. The market forecasts a -0.3% fall in December from -0.9% previously.

“A slowdown in the U.S. economy across the border is expected to see Canadian GDP growth moderate during the year ahead, while the after effect of 2018's fall in oil prices and changes in the domestic housing market will mean inflation also declines in 2019,” says James Skinner, editor at PoundSterlingLive.com in his latest update on the Canadian Dollar. “All of the above factors are forecast to see the Bank of Canada remain on a cautious footing in the months ahead, opting to keep its interest rate steady at 1.75% rather than raising it in the manner that it did back in 2018, when rates were lifted by 25 basis points three times.”

The Pound: What to Watch

Brexit developments will likely remain the main driver for the Pound over coming days.

Over the weekend news reports suggest French President Emmanuel Macron "and other European countries are ready to give Britain legally binding assurances that the Irish backstop is temporary".

"President Macron of France has softened his line in recent weeks to aid a last-ditch attempt by the EU to help get the withdrawal agreement across the line next month," says Bruno Waterfield, Brussels Editor at The Times.

UK Prime Minister Theresa May is currently engaged in negotiations with the EU to win changes to the Irish backstop mechanism: that piece of the Brexit Withdrawal Agreement that could ultimately see the UK locked into the EU's single market and customs if ever triggered.

Legislators in the UK parliament in January rejected the Brexit deal and asked the Prime Minister to deliver substantial changes to the Irish backstop if they were to pass the deal.

For Sterling, the passing of a deal is seen as a best-case scenario as it eliminates a 'no deal' will simultaneously provides at least two years of legislative stability for UK and EU businesses.

"Macron to the Pound’s rescue," says Viraj Patel, foreign exchange strategist with Arkera. "GBP has been broadly stuck in a 1.27-1.32 range since Sep (breaking out only at extreme times of Brexit pessimism/optimism). At 1.28-1.29 we’re in the pessimistic-neutral state, so news like this will on the margin lift."

Looking at the data calendar, the key release for the Pound will probably be employment and wage data out on Tuesday at 9.30 GMT.

The figures come out against a backdrop of falling inflation and broadly waning growth which have brought into question expectations that the Bank of England (BOE) will start raising interest rates as soon as the fog of uncertainty around Brexit has cleared.

“After the worrying GDP numbers for December, a weak set of jobs figures could spark more concerns that the never-ending Brexit saga is starting to have a more profound impact on the UK economy,” says XM.com's Boyadijian.

The unemployment rate remains at historic lows so the key market focus will shift to average weekly earnings in December. If these have increased to 3.5% year-on-year, as forecast, it could push up the Pound. Higher earnings would probably push up interest rate expectations and higher interest rates tend to have a supportive effect on the currency because they attract greater inflows of foreign capital.

“The jobless rate is predicted to have held at 4.0% in the three months to December, while average weekly earnings are forecast to have increased by 3.5 y/y during the same period, accelerating slightly from the prior 3.4%. Faster wage growth could be seen as offsetting some of the negative effects of lower oil prices on the consumer price index, which fell to 1.8% y/y in January,” says Boyadijian.

Another key data releases is the CBI Industrial Trends survey, which can provide a leading indicator for the economy. It is forecast to show a fall to -5 in February from -1 previously.

Public Sector Net Borrowing for the UK in January is out on Thursday at 9.30, and is followed by a speech from BOE’s chief economist Andy Haldane.

The CBI Distributive Trades survey in February is out at 11.00 on Thursday.

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