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Pound-to-Canadian Dollar Rate in the Week Ahead: War of Attrition

Canadian Dollar

Image © Bank of Canada

- GBP/CAD rising but stuck in long-term range

- Clear break higher or lower required for stronger bias

- PMI data, surprise vote on Brexit deal eyed by Pound

- BoC could impact CAD

The Pound-to-Canadian Dollar rate is trading at 1.7555 at the start of the new trading week after rising 2.4% over the previous week; the year's advance now stands at just under a percent.

The Pound has enjoyed a strong start to 2019 as Brexit risks are seen to be fading, but it is against the Canadian Dollar where gains have been harder to come. Indeed, the Canadian currency is easily 2019's second-best performer.

It is little wonder then that GBP/CAD reflects two currencies caught in a war of attrition whereas other Sterling-based pairs are showing clear biases towards further gains.

GBP to CAD weekly

Despite the strong gains in the previous week, which are clearly visible in the long, green, up candle on the chart above, GBP/CAD remains extremely difficult to forecast because it is still in its range - or rising channel - depending on what you want to call it.

From a technical point-of-view the outlook continues to be neutral because GBP/CAD is still trading in a long-term sideways range between roughly 1.75 and 1.68.

Sideways trending markets are notoriously difficult to predict. Our technical stance is, therefore, on balance, still neutral. There is now also the added complication that the pair has reached the top of its rising channel, heightening the possibility of a reversal back down. Such a reversal may occur in the week ahead but is too early to say now.

GBP to CAD daily chart

Only a breakout clearly above or below the parameters of the channel (or range) could provide the basis for a more confident directional forecast.

Such a break would, at the very least, suggest an extension to a target generated by the breakout move - normally calculated as 61.8% of the height of the range extrapolated.

A break above 1.7700 would probably confirm a move to a target at 1.8050, with provisos (see below); whilst a move below channel lows at 1.6825 would probably confirm a bearish breakout to a downside target at around 1.6550.

GBP to CAD monthly

Bulls should also be aware that an upside break runs the risk of running into tough resistance at the level of the 200-week MA at 1.7760, as well as the 50-month MA at 1.7900. Whilst these will probably be overcome by the force of the breakout, they, remain, nevertheless, additional important elements of risk to any upside expectations.

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The Canadian Dollar: What to Watch this Week

The main event for the Canadian Dollar in the week ahead is the Bank of Canada (BOC) policy meeting on Wednesday at 15.00 GMT.

The BOC may well adjust its stance in light of new data that suggests the economy is slowing, and adopt an even more dovish stance (dovish means in favour of lower interest rates).

This would have a depressive effect on the Canadian Dollar because the expectation of lower interest rates is usually negative for a currency. This is because lower interest rates generally attract and keep less foreign capital.

“Investors will be hoping to get a clearer picture about the Bank’s future rate plans amid mixed signals about the Canadian economy in recent weeks. The BoC will announce its latest policy decision on Wednesday and is expected to hold rates at 1.75%,” says Raffi Boyadijian, an economist at broker XM.com.

Other Canadian economic indicators released in the week ahead include December’s trade figures, out at 13.30 on Wednesday, February Ivey PMI scheduled for Wednesday at 15.00, as well as the February employment numbers on Friday at 13.30.

These last are forecast to show the unemployment rate falling to 5.7% in February from 5.8% previously, gross employment to fall by -5k, and the participation rate to fall two basis points to 65.4%.

 

The Pound: What to Watch this Week

The main releases for the Pound next week are services and construction PMIs for February, although, the possibility of an early meaningful vote on Theresa May’s latest Brexit deal remains an overarching risk.

If Theresa May can win concessions from the EU on making the Irish backstop temporary, she may bring forward the meaningful vote before the March 12 deadline date, which means it could happen as soon as next week.

Due to political manoeuvring, any deal she agrees has a higher chance of getting voted through than was the case in January when the deal was shot down by parliament. Brexiteers fearful of Brexit being reversed could be more prone to back May, provided she can get a legal concession on the backstop.

Last week Sterling rose sharply after the Prime Minister announced a series of votes would take place in the event of her Brexit deal being rejected: one of them would be a vote on requesting a delay to Brexit.

With parliament heavily skewed against a 'no deal' Brexit, markets expect a delay to be requested should May's deal fail: for Brexiteers such an outcome would be incredibly problematic as it could open the door to a series of events that results in a much 'softer' Brexit, or no Brexit at all. Suddenly May's Brexit is looking a whole lot more attractive. Last week we heard Jacob Rees-Mogg, the head of the European Research Group which is a cabal of Brexiteer Conservative Party MPs, was softening his stance on the changes required for the deal to get his backing.

“British Prime Minister Theresa May could bring the meaningful vote on her Brexit deal to Parliament early before the March 12 deadline if she manages to secure the legal assurances she is seeking from the EU that the Irish backstop would be temporary if triggered,” says Raffi Boyadijian, economist at broker XM.com. “There seems to be growing movement within MPs, particularly among Eurosceptics, to back the deal if May obtains the legal guarantee after she offered lawmakers a vote on ruling out a no-deal scenario and extending Article 50. Labour’s backing of a second referendum also rattled hardline Brexiteers who may now fear Brexit could be postponed or even aborted.”

The other main release for the Pound is services and construction PMIs. Construction is the first to be released, on Monday at 9.30 GMT, and is forecast to slow to 50.3 from 50.6 previously.

Services is out on Tuesday at the same time and is forecast to come out at 49.9 from 50.1 in January. The services sector accounts for over 80% of UK economic activity and is therefore the survey markets are most interested in and has the greatest market-moving potential.

PMIs are surveys of pivotal purchasing managers in companies within the target sector. They are a leading indicator for the economy. A lower-than-forecast result could weaken the Pound. The possible dip below 50 for the UK’s key services sector is particularly concerning since 50 is the dividing line between growth and contraction. Brexit is not the only determinant of Sterling. Now that fears of no-deal have eased economic data is playing a greater role too.

GBP EUR PMI

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