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The Pound should hold its gains against the Canadian dollar this week, with scope to extend them if Canadian jobs fall short.
The Pound to Canadian Dollar exchange rate has broken the falling trendline that capped every rally since July and cleared the horizontal resistance that sat alongside it, which leaves the market on firmer ground than at any point this quarter.
The move has been orderly rather than emphatic and the pair has edged lower on Monday, so this is a market finding its feet rather than one running away with itself.
From a technical perspective, the test now is whether the broken resistance holds as support, with the rising 100-day moving average, the blue line in the below chart, sitting beneath it:
Above: GBP/CAD daily chart. Image © Pound Sterling Live, chart created with TradingView.
GBP/CAD trades at 1.8845 at the start of the new week, having reached 1.8884 in Monday morning trade before easing, and it now sits above graphical horizontal resistance at 1.8810 that turned back every rally from August onwards.
The falling trendline drawn from the July peak at 1.9050 was the other half of that ceiling, and the market closed above both late last week, which ends the run of lower highs that had held since the summer.
The 100-day moving average has risen since June and sits at 1.8768, a little under half a percent beneath the market, so the pair has a rising trend indicator underneath it rather than a falling one.
What does a broken trendline tell us? A line of that kind is a record of sellers appearing a little lower on each attempt, and a close above it says those sellers have stopped turning up. It does not conjure buyers, which is why the first retest counts for more than the break itself.
Beneath 1.8810 the next reference is the 100-day, and below that graphical horizontal support at 1.8711, the level that worked as a pivot through September.
Our base case is for the Pound to hold above 1.8810 and work higher towards the July peak at 1.9050, a journey that will take longer than a week. A daily close back beneath 1.8810 would put the pair back inside the range it has traded since August and leave our Pound to Canadian Dollar forecast looking at 1.8711 again.
Our call a week ago was for a drift towards the September low with rallies fading beneath 1.8810. It was wrong, and the condition we set for being wrong, a daily close above that band, is precisely what the market delivered.
Sterling Carries a Bid of Its Own
The Pound is well supported in its own right. The economy is running a firmer pulse than most of its peers, gilt yields are elevated, and money leaving France has to find a home, with the UK among the beneficiaries of the widening in French spreads.
Sterling's own calendar carries the final reading of September's services PMI on Monday at 09:30, where the flash estimate was 51.7, the construction PMI on Tuesday at 09:30 after a previous reading of 44.3, and Bank of England Chief Economist Huw Pill speaking in London on Thursday at 11:30. The 28 October Budget remains the risk that caps how far the Pound can run.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistCanada's Jobs Report Is the Week's Test
Friday's employment report at 13:30 is the week's tier-one event for the Loonie. The market looks for a gain of 9,200 jobs with the unemployment rate ticking up to 6.5% from 6.4%, while CIBC and RBC both pencil in a more modest 5,000.
A reading above expectations says the economy can carry higher interest rates, which supports the Canadian dollar and pushes GBP/CAD lower, and a miss does the reverse. August's merchandise trade figures on Tuesday are second tier, with CIBC looking for a surplus of C$1.5BN.
"We maintain a constructive but increasingly nuanced view on the CAD," say strategists at Barclays in a weekly strategy note. Monthly GDP came in at 1.4% year-on-year, ahead of expectations, but the bank sees emerging signs of softer Canadian growth and flags downside risk to this week's PMI and employment figures.
"However, the CAD has underperformed recently and positioning remains short, limiting potential downside to future surprises," the bank adds, while seeing "scope for the BoC to upgrade its growth and inflation forecasts and retain a hawkish bias in the October MPR."
The positioning point is borne out in the futures data. Speculators were short the Canadian dollar to the tune of 78,671 contracts in the week to 29 September, having added 25,461 to the position in a single week, according to CFTC figures compiled by RaboResearch.
That crowded short is the chief risk to our view, because a squeeze would lift the Loonie and push the pair back beneath 1.8810. The Bank of Canada's next decision and its Monetary Policy Report land on 28 October, the same day as the UK Budget, which makes that the date to mark rather than anything on this week's calendar. Until then, our Pound to Canadian Dollar forecast stays with the break.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
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