Canadian Dollar Still in Command, Forecast to Push Pound to 1.8515-1.86
Our forecasts on trade between the British pound and Canadian dollar have proven solid over recent days with a particular chart pattern suggesting further declines are possible.
The Canadian dollar has been an under-performer in global FX over the past 24 hours, bringing a pause to its recent dominant performance.
The halt has allowed the GBP/CAD advance on the back of a short-covering rally ensuring the period of consolidation at multi-month lows continues. At the time of writing the inter-bank market is quoting the pair at 1.8913. Bank transfers are seen towards 1.8376 while getting a quote from an independent specialist would deliver something in the region of 1.8676.
Nevertheless, we believe the underlying trend remains weak and join those analysts who view the consolidation in price this week as no more than a pause ahead of another run lower.
The Canadian dollar will likely keep advances by the British pound capped as crude oil prices have seemingly stabilized in the high $33 range which has helped support CAD’s outlook.
Canadian GDP numbers were meanwhile a slight beat coming out at 0.2% vs. its 0.1% growth estimate. "The use of fiscal instead of monetary policy, a bottoming out in oil prices and a more dovish Fed mean that the CAD’s worst days are behind it," says Royce Mendes at CIBC in Toronto
As a result of improving sentiment in the CAD, traders are taking any temporary weakness in the currency as an opportunity to buy.
The GBP to CAD conversion therefore remains a sell on upticks.
Analyst Shaun Osborne at Scotiabank points to bearish momentum indicators as advocating for a continuation of the move lower:
"Trend momentum signals are bearishly aligned across short, medium and longer-term studies and the bear move lower we have outlined as the main risk following the break under 1.9740 (2.0965 double-top trigger) remains incomplete (we target 1.8515)."
The Scotiabank analyst foresees a possible downside ‘overshoot’:
"The strength of the sell-off has alerted us to the risk of an overshoot to 1.75/1.80 potentially in the next few months."
Latest Pound / Canadian Dollar Exchange Rates
  | Live: 1.8608▲ + 0.04%12 Month Best:1.8915 |
*Your Bank's Retail Rate
| 1.7976 - 1.805 |
**Independent Specialist | 1.8348 - 1.8422 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
A Break Below 1.8729 Could See Selling Accelerate
We saw the sharp decline in GBP/CAD coming when we noted the formation of a double-top in the pair.
We forecast an initial target at 1.9025 which we calculated by extending the height of the pattern by 61.8%; this has now been met.
A double-top can be a formidable forecasting tool - the pattern forms when a currency pair makes a high, falls, and then rebounds to a high at roughly the same level as the previous peak, before starting to decline again.
A break below the low formed in the middle of the two peaks is the activation 'trigger' for a swift move lower to a price target of 61.8% or 100% of the height of the pattern extrapolated down.
With the initial target now met there is an increased chance the pair will stall or possibly even reverse higher – although current price action in no way indicates a meaningful rebound is yet underway.
The second target for the double-top has still not been met at roughly 1.8600 (Scotiabank place it a little lower at 1.8515), which corresponds to the 100% extension of the pattern.
A break below the 1.8729 lows would be a strong signal of continuation, towards the aforesaid target.
Tomorrow (Wednesday March 2) is likely to be a down-day
The pair has corrected higher for two days in row, and this occurring within a down-trend is often a strong (66%) signal that the following day will be a down-day.
The 4-hr chart that shows the current two-day recovery has traced out an A-B-C pattern.
The falling volume during this correction is further evidence of underlying weakness, and that the down-trend will probably renew.
