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The Pound-to-Canadian-Dollar Rate in the Week Ahead: Bear Trend Continues Unabated

Image © Bank of Canada 

- GBP bear trend accelerates, eyes new lows.

- Possibility of decline all the way to 1.6000.

- GBP driven by Brexit and domestic politics.

- Canadian Dollar eyes central bank meeting.

The Pound-to-Canadian-Dollar rate was trading around 1.6378 Monday after falling more than a full percentage point in the previous week although studies of the charts suggest the bear trend is likely to continue over the coming days.  

The 4 hour chart shows the pair in a steepening downtrend although the relative-strength-index (RSI) momentum indicator is converging with price, which is a bullish sign that suggests the bears could take a breather and the exchange rate might go sideways for a while. However, and eventually, the market will probably extend lower.

‘Convergence’ occurs when price makes a new low but momentum does not, and signals waning bearish enthusiasm. Any break below the previous 1.6365 low would provide confirmation of a continuation down to 1.6200. 

The 4 hour chart is used to determine the short-term outlook, which covers the next five days. 

Above: Pound-to-Canadian-Dollar rate shown at four-hour intervals.

The daily chart shows the pair in an established downtrend, which we expect to continue. The RSI momentum indicator is corroborating the downtrend and at the last low in price, the RSI also made a new low. This suggests the downtrend will remain supported by bearish momentum. 

A break below the 1.6365 lows also suggests a continuation lower on the daily chart - in this case, as far as 1.6100. The daily chart is used to determine the short-term outlook, which includes the next one-to-four weeks.

Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

The weekly chart is showing the possibility of a bearish continuation down to a potential downside target at 1.600 in the long-term. The pair may have formed a ‘measured move’ price pattern since rolling over at the March highs. 

If so, the final C-D leg currently unfolding will lead to an extension down to an even lower level in the following months. The length of C-D is usually similar to A-B which suggests an eventual downside target of 1.6000. 

The weekly chart is used to determine the short-term outlook, which includes the next one-to-three months.

Above: Pound-to-Canadian-Dollar rate shown at weekly intervals.

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The Canadian Dollar: What to Watch

The main event for the Canadian Dollar in the coming week is the interest rate meeting of the Bank of Canada (BoC) which is set to end with an announcement on Wednesday, July 10 at 15.00 BST. 

"Since December, the Bank has been primarily focused on housing, energy markets and global trade, and we have seen a number of conflicting developments to global trade tensions since the April MPR (US/China escalation vs steel/aluminum tariffs removal)," says Mark McCormick, head of FX strategy at TD Securities. 

There is no expectation of a change from the current 1.75% so analysts will instead be focusing on what the Bank says about future policy. In the last statement, the bank hinted it's not planning to changing rates any time soon. 

But recent economic data has been positive, with a surprise rise in the May trade surplus due to increasing exports and a strong 3.6% rise in average wages in the labour report, as well as robust full-time job gains. 

Canadian investment bank TD Securities looks for the BoC to leave the cash rate at 1.75% and await more clarity surrounding the global outlook. Despite the Canadian economy appearing to be immune from an ongoing global slowdown, the BoC is still watching external factors. 

"The Bank has also signaled it is keenly focused on incoming data, which has surprised materially to the upside since April and pushed Q2 tracking towards 3%, well above official estimates. All this suggests the BoC is in no rush to follow G10 central banks lower, and will require more time to assess global trade conditions and their impact on growth before shifting from the current policy stance,” McCormick says.

FX broker XM.com also says the BoC will remain on hold as global uncertainty continues to reign in instincts to hike rates, which would normally be strong after a run of so much positive data.

“The Bank is widely anticipated to keep rates at 1.75% at its meeting on Wednesday and futures markets see only about a 20% probability of lower rates by December. With the Bank’s announcement statement not expected to give much away, investors will be looking at Stephen Poloz’s press conference and the quarterly Monetary Policy Report for more clues on what direction the BoC will take in the coming months,” says Raffi Boyadijian at XM.com. 

Apart from the BoC meeting, oil prices could also impact on the Canadain Dollar because crude is the country’s largest export product and WTI is trading at around $57.70 a barrel after a marginal rebound last week on news OPEC continued to prop up the price by extending self-imposed production cuts.

Furthermore, an Iranian tanker was held by British armed forces in the straits of Gibraltar on suspicion of breaching sanctions not to sell to Syria, which may also have helped to prop up prices. Gains would have been greater if inventory data had not shown lower-than-expected draws, suggesting moribund demand. 

In the week ahead there is a risk of a further geopolitical shock linked to trade relations with Iran, which could push oil higher, and take the Canadian Dollar upward with it.

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The Pound: What to Watch this Week

The main driver of the Pound in the week ahead is likely to be political uncertainty.

It will probably trade with a downside bias as a result of rumours the next leader of the Conservative party - in all probability Boris Johnson - will face little choice but to call a snap General Election before 2019 is out if he is to have any chance of passing a negotiated Brexit deal through parliament.

Expectations for the Conservative's wafer-thin majority to be overturned in the event Johnson tries to lead the UK into a 'no deal' exit from the EU would leave the fresh Prime Minister with little choice but hope that the country will back him in another vote.

However, General Elections usually result in more political uncertainty and weaken the Pound, so the outlook is overall bearish from a fundamental point of view.

We will be watching for further developments on this front over coming days, while keeping an ear on Johnson's campaign for suggestions as to how he might deliver Brexit.

The main economic driver is GDP data for May, which is expected to show a rebound of 0.3% after a negative growth rate in April.

UK economic growth is a key driver of the Pound as it influences capital inflows and a worse-than-expected result could impact negatively on the already vulnerable Pound.

“The economy probably underperformed its European partners in the second quarter as the Brexit extension has only prolonged the period of uncertainty for British businesses. UK GDP shrank by 0.4% month-on-month in April and data due on Wednesday is forecast to show GDP recovering by 0.3% in May,” says Raffi Boyadijian, an economist at XM.com.

The other main data releases for Sterling are industrial and manufacturing production in May, which are likely to show positive recoveries as April’s stats were kept ‘artificially’ low due to one-off factors.

“Both industrial and manufacturing output also slumped in April as firms sought to run down the large stockpiles they built in the prior month. In May, they’re expected to have rebounded by 1.5% and 2.5% m/m, respectively.”

All the major data releases are scheduled for release on Wednesday, July 10 and 9.30 BST.

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