The Pound-to-Canadian-Dollar Rate: Risk of Reversal Increases as Major Level Looms

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- GBP almost touches major long-term support level.

- GBP rebound so far quite strong, could extend further.

- GBP eyes incoming Prime Minister as oil drives CAD.

The Pound-to-Canadian-Dollar rate was trading at around 1.6311 early Monday after falling around half a percent in the previous week, although studies of the charts suggest the pair could be about to embark on a strong recovery.

Four-hour charts, which we use to determine the short-term outlook including the next 5 days, shows the pair moving higher after being in a consistent downtrend. It's still too early to be sure whether the market is about to reverse higher so we remain in a wait-and-see mode and anticipate mixed trading over the next few days. 

The question now is whether this ‘bounce’ is likely to be the start of a bigger move higher or just a correction in the already established downtrend. 

The move up has already formed two sets of higher highs and higher lows, which is a sign a new uptrend may be starting. And the relative-strength-index (RSI) momentum indicator has accompanied the move higher with a steep rise of its own, further suggesting the upturn could have legs.

In addition, the July 16 lows at 1.6145 are relatively close to a longer-term level of support for the pair at 1.6000. This could mean the market considers that level  to have already been reached, which would strengthen the argument for a reversal.

A break above the 1.6430 resistance level would confirm the extension of the small uptrend into something bigger, likely taking the market up to a target of 1.6595 which coincides with the 2018 lows. 

Likewise, a break below the 1.6145 lows would signal a continuation downward, likely dragging the market toward 1.6000. Another possibility is the pair may enter a sideways period of consolidation, with a ceiling at 1.6430 and a floor at 1.6145.   

Above: GBP/CAD rate shown at 4-hour intervals.

The daily chart, which we use to give us an indication of the outlook over the medium-term including the next month ahead,  shows the pair in an established downtrend with signs that it may have bottomed at the recent July 16 lows. These are not enough to confirm a reversal higher though. 

The daily chart shows the same scenarios playing out as in the 4-hour chart but with wider targets. A break to the upside would probably eventually take the market through the 2018 lows and reach as high as 1.6760. 

In the bearish case, a break below the July low would probably result in a bounce off the key 1.6000 target back up toward current levels. The RSI momentum indicator has just exited the oversold zone, which is a signal to ‘buy’ and suggests the trend may be reversing. Price action around the key July 16 low has the look and feel of a bottom.

Above: GBP/CAD rate shown at daily intervals.

The weekly chart, which we use to give us an idea of the longer-term outlook including the next few months ahead, shows the pair forming a large ‘measured move’ price pattern. This looks to have either finished or be almost finished. 

With measured moves the final C-D leg is usually of a similar length to the first A-B leg, suggesting an eventual downside target at around 1.6000. The July 16 low at 1.6145 was close enough to 1.6000 to potentially mark the end of the measured move.

This is important because once the pattern is complete the next move is likely to be up. Another possibility is that the pair could still go lower and actually touch 1.6000. After that, it would be expected to move higher, probably up toward the 2018 lows.

Other bullish signs on the weekly chart are the hammer candlestick pattern that formed last week, which is a bullish reversal pattern, and the fact the RSI momentum indicator has just exited the oversold zone which suggests positioning may be stretched to the downside. 

Above: GBP/CAD rate shown at weekly intervals.

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The Canadian Dollar: What to Watch

The Canadian Dollar is more likely to be supported by market fundamentals than not in the short-term. The Canadian economy is performing fairly well and the Bank of Canada (BoC) is one of the few major central banks that is not currently considering cutting interest rates. 

The fact the BoC is probably not going to cut rates from their current level of 1.75% gives the Canadain Dollar an advantage since lower interest rates tend to weaken a currency because of their impact on capital inflows. 

Having said that, the Loonie weakened last week after the release of worse-than-expected retail sales data but is this enough to suggest cracks in the Canadian economy could reverse the assumption the BoC will stay on the sidelines? TD Securities says no. 

The other driver for the Canadian Dollar this week will be the price of oil, which has been rising due to geopolitical tensions between Iran, the UK, and the U.S. Iran is a major oil producer but because of tough sanctions it cannot export its oil very easily.

With a slice of oil supply off the table and the prospect of a conflict in the gulf further endangering the international oil supply, prices have risen. The situation doesn't look like it's going to change very soon so oil could remain supported and a tailwind for the Loonie.

Crude oil inventory data for the past week, out on Wednesday at 15:00 London time, could also be key for prices. 

The main factor impacting on Canadian oil more specifically is the progress of the Transmountain oil pipeline in Alberta designed to help diversify the market for Canadian oil away from dependency on the U.S. by enabling Canada to pump oil toward the west coast, which would open up the Asian market. 

But the pipeline has met with much opposition from environmental groups and work was delayed after a court ruled it would be detrimental to wildlife. This ruling was recently overcome although any further news regarding the pipeline will be important for the Loonie. 

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The Pound: What to Watch

The major driver of the Pound this week is likely to be the announcement of the winner of the Conservative Party leadership election on July 22, but with little difference remaining between the two candidates' stated Brexit policies, the result may not cause as much volatility as previously expected. 

Jeremy Hunt is seen as more ‘moderate’ and less likely to take the UK out of the EU without a deal, so his election might provide some relief for Sterling. The opposite is true of Boris Johnson, who is the bookmakers' favourite to win, although such an outcome is likely in the price of the Pound by now. 

According to betting website oddschecker, Johnson's chances of winning have increased to 97.08%. On the data front the major release is the CBI Industrial Trends survey, which on Tuesday and a speech from Bank of England’s (BOE) chief economist Andy Haldane on the same day.

Andy Haldane is set to make a speech at 13.15 on Tuesday. The market will be keen to hear his views on the economy after recent mixed data. Previously the BOE had been one of the few major central banks not expected to cut interest rates, and was actually talking about raising them. Much depends on Brexit of course. Will Haldane continue to endorse a marginally hawkish stance, or is he going to turn more neutral? On Tuesday we shall see. If he changes his tune it could weigh on Sterling.

The CBI survey is usually closely followed because it provides timely insight into changing industrial trends. Industrial production unexpectedly plunged -2.7% in June and although it rebounded 1.4% in July it was a worrying result, and the worst since 2013. Investors will therefore be keen to see what the CBI data reveals when it is released on Tuesday at 11.00 BST and whether the sector is likely to see more declines in the future or not. 

Above: Changes in UK industrial production. Source: Tradingeconomics.com.

 

 

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