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Pound-to-Canadian Dollar Rate Week Ahead Forecast: Short-Term Trend Flips Higher

Canadian Dollar

Image © Stockyme, Adobe Stock

- GBP/CAD reverses its short-term trend - starts rising

- A clear break above 200-week to confirm more upside

- Brexit main driver for GBP; employment data for CAD

The Pound-to-Canadian Dollar rate is trading at 1.7667 at the start of the new week, over 1.75% higher than it was at the same point last Monday, suggesting near-term momentum rests with Sterling.

From a technical perspective, our studies suggest the trend has flipped and is now marginally bullish. Despite repeated attempts to break below the 1.7300 level the pair failed and ripped higher last week on heightened speculation of a Brexit deal.

GBP to CAD weekly

It has now reached the 200-week moving average (MA) in the 1.7680s and there is a risk this could temporarily or permanently obstruct further upside.

We classed the temporary breakout of the top of the ascending channel in March (circled) as most probably an exhaustion break and, therefore, and indication of the end of the uptrend, however, this may not have been the case as the strong rebound last week proves.

Indeed, it is possible the breakout higher was actually a bullish trend-extension signal rather than an exhaustion break.

4 hour chart

The 4hr chart is showing further evidence a short-term bullish trend is forming. The pair has formed more than two sets of higher highs (HH) and higher lows (HL) - one of the signs analysts use to evidence the start of a new trend.

GBP to CAD daily

But, given the presence of the 200-week MA firmly blocking more upside at the current market highs, a clear break above this obstacle would be necessary to reinvigorate the uptrend. Such a break would be confirmed by a move above the 1.7795 March highs, and after that there would be a good chance the pair could extend up to a target at 1.8000.

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The Canadian Dollar: What to Watch

The Canadian Dollar is in focus later on Monday when Bank of Canada Governor Poloz will speak about "The Future of the Mortgage Market" at 18:45 B.S.T, with an audience Q&A and press conference scheduled to follow.

The talk will be of interest considering persistent fears in Canada that the housing market was inflating to the extent that the risks of a housing bubble were growing.

However, of late, home sales and prices have slowed in Canada after governments at various levels took steps to mitigate the risks of a crash.

"We will be watching closely for any hints on the Bank's outlook for the housing market ahead of the Financial System Review on May 16," says a note from TD Securities ahead of the talk by Poloz.

Poloz last week said after a “huge run up in housing,” speculation is coming out of the Toronto and Vancouver housing markets, but more time may be needed for it to settle out completely.

While the issue will most likely not have an immediate bearing on the Canadian Dollar, it does help inform the narrative on Bank of Canada policy going forward, and this is what determines the currency's value over longer-term time frames.

The main release for the Canadian Dollar is jobs data for March, which is forecast to show a small 1k rise in employment and no-change in the unemployment rate of 5.8%, when it is released at 13.30 BST on Friday, May 10.

Jobs data is important as it is a key indicator of economic health and the state of the economy impacts on interest rate expectations and the currency. Higher rates generally strengthen the local unit by attracting greater inflows of foreign capital.

Currently market expectations are rather dovish in the case of the Bank of Canada (BOC) which is seen as more likely to reduce interest rates than hike them, however, these expectations do not take into account positive factors for the currency and economy such as the recent rise in oil prices - Canada’s primary export. Analysts at NBC are looking for the Canadian Dollar to strengthen into year-end as expectations turn more positive.

Recent comments from Poloz also suggest a shift is taking place to a more optimistic stance within the bank’s governing council.

There is a risk, therefore, that a surprisingly good jobs report will result in a recovery in the Loonie (bearish for GBP/CAD).

“The Canadian dollar has seesawed during the past week as the Bank of Canada’s governor, Stephen Poloz, kept rate hike hopes alive in comments to parliament, reversing some of the bearish moves following last week’s dovish BoC meeting, the loonie could recover further if jobs figures on Friday point to a strong labour market,” says Raffi Boyadijian, an economist at XM.com.

Another important release for the economy is balance of trade data, which is forecast to show the deficit narrow to C$-2.3bn from C$-2.9bn previously, when it is released on Thursday at 13.30. Trade is an input into GDP growth and the deeper the deficit the more it is a drag on growth. Likewise a narrower deficit or surprise lift into surplus territory could be supportive of CAD.

BOC governor Poloz is scheduled to make a speech on Monday at 18.45 which could impact if he discusses the economy or monetary policy.

Apart from housing data the other main release is Ivey PMI - a general Canadian business sentiment survey - which is forecast to fall to 51.1 from 54.3 previously, when it is released at 15.00 on Tuesday.

 

The Pound: May's Concessions to Corbyn, GDP

We expect Brexit to remain the major mover of the Pound over coming days as this week has been set as the deadline by Prime Minister Theresa May for a deal between Labour and the Conservatives to be agreed.

Reports over the weekend suggest May is prepared to offer Labour fresh concessions to allow the two sides to come together.

According to Tim Shipman, political editor at The Sunday Times, "Theresa May will take a final desperate gamble to deliver Brexit this week by offering Jeremy Corbyn three major concessions in a bid to force MPs to back a new deal."

On Tuesday, May is being tipped to make a “big, bold” offer to Labour.

This could well be the point at which we find out whether a cross-party compromise is possible.

However, there are fears the PM's offer "could split the Conservative Party down the middle," says Shipman.

Labour are demanding the UK enters into a customs union with the EU following Brexit, which would mean the country is unable to strike independent trade deals which has been a key test of Brexit for many in the Conservative Party.

Labour and the Conservatives might well strike a deal but both parties are deeply divided over the issue and therefore even a deal does not necessarily a majority in the House of Commons can be secured.

So while the news pulse has turned positive for Sterling over recent days, there are clear limits as the risk that no deal is done and the Prime Minister resigns remains substantial we believe.

The main economic release for the Pound is preliminary GDP data for the first quarter, out at 9.30 BST on Friday, May 10.

This is expected to show a 0.5% rise compared to 0.2% of Q4 which would suggest the economy remains robust in the face of the ongoing Brexit saga. On an annualised basis i.e extrapolated to provide a yearly estimate, GDP is expected to have rise 1.8% compared to the 1.4% previously.

Other key releases out at the same time are the trade balance for March, manufacturing production for March, industrial production for March and business investment (Q1).

Business investment is expected to remain especially subdued as it is one of the facets of the economy hardest hit by Brexit.

Another important release is Halifax house prices out at 8.30 on Wednesday, and speeches from the Bank of England's Cunliffe and Haldane on Tuesday evening.

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