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Pound / Canadian Dollar Forecast: Short-Term Trend Flips Bearish Again

Canadian Dollar

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- Short-term trend reverses and falls through 50-day

- GBP/CAD neutral with slight bearish bias

- Cross-party Brexit talks main driver for GBP

- Inflation data eyed by CAD

The Pound-to-Canadian Dollar exchange rate is trading at 1.7460 at the start of the new week slightly higher than it closed out the previous week when it dropped 1.35%, on increasing Brexit concerns.

The Pound has lost ground following signs cross-party Brexit talks are getting nowhere. Compromise looks harder to achieve as both Conservatives and Labour harden their positions as opinion polls show Nigel Farage’s Brexit party surges in popularity in the run up to the European elections later in the month.

The Canadian Dollar, meanwhile, remains supported after the release of positive jobs data last week helped improve the outlook for the economy.

From a technical perspective, the GBP/CAD exchange rate appears to be flip-flopping and the forecast is neutral with a marginal bearish bias. Two weeks ago it turned marginally bullish and then last week it suddenly appeared to flip bearish again. These are choppy ‘seas’, so traders beware!

GBP to CAD weekly chart

Looking at the short-term 4hr chart we note it's possible to see a short-term bearish trend forming. The pair has completed two sets of lower highs (LH) and lower lows (LL) - one of the first signs alerting analysts to the onset of a new downtrend.

GBP to CAD 4 hours

If the pair breaks below the 1.7427 lows, it would probably lead to a decline to the next target at the April lows at 1.7325. Such a move is possible in the next week.

The medium-term outlook is complicated - which broadly encompasses the 3-6 month timeframe - the pair is rising in a fairly bullish channel but has also just run up against a substantial barrier of resistance from the 200-week Moving Average at 1.7660.

Large Moving Averages often cap trends and sometimes mark reversal points.

GBP to CAD daily

The daily chart shows how the move higher suddenly stalled, reversed, and started declining last week. It has now also broken clearly below the 50-day Moving Average at 1.7516 (circled), which is a bearish sign.

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The Canadian Dollar: What to Watch this Week

The main releases on the horizon for the Canadian Dollar are inflation data, commentary from Bank of Canada (BOC) officials, and manufacturing sales data.

Broad inflation for April is forecast to show a slower 0.4% rise compared to the previous month when it increased 0.7% when it is released at 13.30 BST on Wednesday, May 15.

Compared to a year ago (YoY), however, headline inflation is expected to have risen by 2.0% from 1.9% previously.

Core inflation, which cuts out volatile food and fuel components, is forecast to have risen by 1.8% from a year ago, compared to 1.6% YoY in March.

Inflation impacts on currencies because it informs central bank policymaking on interest rates, which tend to rise and fall in line with inflationary pressures.

When interest rates rise they tend to attract and keep greater inflows of foreign capital which boost demand for the local currency. If inflation data for April rises in accordance with or above expectations it could increase the chances of the BOC increasing interest rates with upside potential for the Loonie.

“The headline CPI rate jumped to 1.9% in March, while underlying measures of inflation also ticked higher. Further strength in consumer prices in April would certainly catch the attention of the Bank of Canada, which has not ruled out resuming its rate hike cycle, contrary to what the markets think. Investors are pricing in about a 50% probability of a rate cut before the year is out despite the bullish oil market and a neutral BoC. This suggests the loonie has room to move significantly in either direction should the incoming data support a rate cut or take it off the table,” says Raffi Boyadijian, an economist at forex broker XM.com.

The other key events on the radar for the Loonie are speeches from BOC officials including deputy governor Lane, on Monday at 22.30, and governor Poloz on Thursday at 16.15.

The BOC’s official stance is neutral so any shift could impact the Loonie. The market is currently more optimistic than the BOC based on rising oil prices and a stronger economy, so the risks are tilted in favour of the BOC moving to a more hawkish stance (meaning in favour of higher rates).

The other key release for the Loonie are manufacturing sales which are expected to show a 1.1% rise in March after a decline in the previous month when they are released on Thursday at 13.30.

 

The Pound: What to Watch this Week

The main economic release out for the Pound this week is March jobs data. The UK labour market has been resilient in the face of political and economic uncertainty of late and if that idea is reinforced again this week then the Pound might benefit. 

A strong labour market can mean rising wages, increased inflation and higher interest rates further down the line, which could then lead to a stronger Pound because currencies tend to rise and fall with interest rates.

February’s figures were especially good after they showed the unemployment rate remaining at only 3.9% and some 179k new jobs being created. March is expected to have seen the unemployment rate remain steady.

Average earnings growth is expected to be a slightly lower than in February, coming in at 3.4% annualised, down from 3.5% previously.

“The UK jobs market has been fairly resilient even though economic growth has slowed notably from the ongoing Brexit uncertainty,” says Raffi Boyadijian, economist at FX broker XM.com. “Wage growth in the UK is currently at a 10-year high, which is good news for consumers who have been the main drivers of the British economy amid weakening overseas demand and falling business investment from Brexit.”

Brexit continues to be a major risk factor for the Pound, which could see loses in the week ahead if tenuous cross-party talks breakdown.

A rise in support for Nigel Farage’s Brexit Party, which is leading in the polls with 34% of the electorate ahead of the May 23rd vote, may mean it's less likely Labour and the Conservatives will strike a deal as the pressure on the Conservatives to pursue a 'clean break' Brexit is growing.

In an interview with the Guardian over the weekend, the leading Labour negotiator Sir Keir Starmer said it was increasingly likely that Labour would only back a deal that provided for a second referendum on EU membership. Starmer said there was a huge segment of Labour parliamentarians that would only consider voting through a deal if a second vote was provided for, therefore he believes it would be futile to agree to any deal that does not provide for one.

The Conservatives would almost certainly vote against any deal that does contain a provision for a second vote.

We expect the death of talks will be announced within days.

The prospect of May departing and a general election occurring over coming months therefore remains high, creating the kind of uncertainty that would be expected to keep Sterling under pressure.

Above: UK opinion poll outcome. Source: The Guardian.

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