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Pound-to-Canadian Dollar Rate 5-Day Forecast: Downtrend to Extend After Channel Breakdown

Poloz in focus

Above: The BoC's Governor Poloz is in focus this week. Image © Bank of Canada

- Breakout from channel suggests more weakness

- Recovery insufficient so bears still in control

- Leadership race to dominate Pound; BOC meeting CAD

GBP/CAD is trading at 1.7098 at the time of writing having endured a volatile week prior in which it fell all the way down to the 1.69s before rising up and ending the week near the open.

Sterling has declined in a long move lower against the Canadian Dollar during May, and although it rebounded at the end of last week, the dominant downtrend remains intact and further losses are eventually probable. The old trading adage that ‘the trend is your friend’ suggests the current downtrend is likely to continue.

GBP to CAD daily chart

The pair has also broken cleanly out of a rising channel, and this is a further bearish sign. When prices break out of a channel the general expectation is that they will fall as far as the height of the channel extrapolated lower by at least 61.8%. This suggests a minimum downside target of 1.6665. This may take some time to reach, however, and initially, we see a probable move down to 1.6760 instead.

GBP to CAD weekly chart

A break below the 1.6900 lows would provide confirmation of a continuation lower.

There is also a possibility the pair could go sideways or even start a new trend higher. The pair has formed a hammer candlestick on the weekly chart and if this is followed by another bullish candlestick this week, it will provide confirmation of more upside.

The pair has also formed a bullish hammer candlestick on the daily chart last Wednesday, and this indicates a propensity to more upside. This was followed by two further bullish days suggesting confirmation of a short-term reversal. It was also accompanied by a bullish signal from the RSI momentum indicator in the lower panel after it exited its oversold zone.

Time will tell whether these seeds germinate into a stronger bullish reversal, at the moment we remain bears due to the still intact overarching bearish short-term trend, and the downside channel break.

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The Canadian Dollar this Week: Bank of Canada Dominates Outlook

The main event on the horizon for the Canadian Dollar is the Bank of Canada (BOC) rate meeting, where policymakers are expected to maintain their neutral stance with a bias towards hiking interest rates, when it takes place on Wednesday, May 29, at 15.00 BST.

“The Bank of Canada joined the Fed in hitting the pause button earlier this year, but unlike the Fed, the BoC has maintained a tightening bias,” says Raffi Boyadijian, an economist at FX broker XM.com. “BoC Governor Stephen Poloz is expected to reaffirm his recent view that the “the natural tendency is for interest rates to still go up a bit” when the Bank announces its latest policy decision on Wednesday.”

When interest rates go up it is generally good news for the currency as it attracts greater net inflows of foreign capital, drawn by the promise of higher returns, therefore, if governor Poloz does hint the Bank is considering raising rates, it will probably be positive for the Canadian Dollar.

The other main release for CAD is Q1 GDP, which is forecast to rise at an annualised rate of 0.7% when it is released at 13.30 on Friday, May 31.

“On Friday, first quarter GDP estimates will be key in helping policymakers decide whether the economy is on the mend from the soft patch experienced at the end of 2018,” says Boyadijian.

Analysts at Wells Fargo, meanwhile, are a little more optimistic about growth, seeing the possibility of a rise of 0.8% in Q1, mainly due to the boost from higher oil prices.

“After ending 2018 on a weak note, Canadian economic growth is expected to improve moderately in Q1 2019,” say Wells Fargo economists in a briefing note to clients.

 

The Pound: Data-Light Week, Politics to Dominate

The main focus for the Pound over the coming week will be political, as the European Union election results are published and likely to show the ruling Conservative Party as having suffered a considerable defeat.

Out of 64 MEPs declared so far, Nigel Farage's Brexit Party has won 28, the Liberal Democrats 15, Labour 10, Greens seven, the Conservatives three and Plaid Cymru one.

"With a big, simple message - which is we've been badly let down by two parties who have broken their promises - we have topped the poll in a fairly dramatic style," says Farage on the BBC's Radio 4. "The two party system now serves nothing but itself. I think they are an obstruction to the modernising of politics, and we are going to take them on."

The extent of the defeat suffered by the Conservatives is sizeable and could be important as it may impact decision-making by party members as to who would be the most suitable replacement for Prime Minister Theresa May who resigned last week.

The worse the defeat the more likely the party will choose a potential leader with broad appeal such as Boris Johnson. Johnson is a Brexiteer who has said that if he were PM, we would be leaving the EU on October 31 “with or without a deal”.

The exact line-up of potential candidates will probably be announced within the next week and the selection and their potential impact on Brexit is likely to affect the Pound. Current contenders include Boris Johnson, Andrea Leadsom, Dominic Raab, and Michael Gove, all of which are considered Brexiteers. Jeremy Hunt is the leading remain voting contender, but even he describes himself as a 'born again' Brexiter.

The EU said it has not changed its stance on Brexit after May’s resignation, and that “our position on the withdrawal agreement - there is no change to that,” according to EU spokesperson Mina Andreeva.

A summer of political intrigue lies ahead, and the uncertainty should keep Sterling under pressure.

On the hard data front, the week ahead is expected to be relatively uneventful.

Consumer Confidence is probably the most important release, and is forecast to show a moderation to -12 in May from -13 previously, when it is released at 00.01 B.S.T. on Friday, May 25.

The inflation report hearings on Tuesday morning could also impact the Pound as Mark Carney, the governor of the Bank of England (BOE) and several Monetary Policy Committee members testify on the inflation and economic outlooks before Parliament's Treasury Committee, however, much of what they say will be highly conditional on the outcome of Brexit.

Housing data is highlighted, with mortgage approvals out on Tuesday at 9.30 and the Nationwide house price index is out on Friday at 7.00.

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