More Pound / Canadian Dollar Exchange Rate Weakness Forecast

The GBP to CAD exchange rate is projected to experience further downside pressures as sentiment towards Pound Sterling deteriorates over the emerging shape of an impending Brexit.

The first trading day of the month saw the GBP/CAD exchange rate break below the key support level at 1.70. 

We wrote last week that 1.70 was proving to be an admirable support level for GBP/CAD and we remained open to the possibility of a rebound were the level to hold.

At the time of writing the pair is quoted at 1.6824 and our studies suggest the move down looks incomplete. 

We expect another sharp leg lower to evolve that should ensure the pair reaches 1.6900.

A continuation down would gain confirmation from a break below the 1.6977 lows, which has been broken over recent hours:

Scotiabank’s FX Strategist Shaun Osborne, is also bearish, saying, “GBPCAD is poised to close lower for a third, consecutive week, adding a little more negative “spin” to what remains, in our opinion, a weak, underlying technical picture.”

Eventually, Osborne sees a retest of 1.66 as on the cards:

“We see support in the low 1.69s but consider last week’s low at 1.6895 as the key swing point for the market from here. Having failed at the upper end of the broader trading range in place since late June, we continue to look for GBPCAD to retest 1.66.”

Latest Pound / Canadian Dollar Exchange Rates

	Live: 1.8599▼ -0.01% 12 Month Best: 1.8915
*Your Bank's Retail Rate	1.7966 - 1.8041
**Independent Specialist	1.8338 - 1.8413 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Canadian Dollar Boosted by Oil, GDP Data

A complete reversal in the pair came about at the end of the week due to the Canadian dollars high correlation with oil, its most significant export.

The decision by OPEC to reduce supply by 800k barrels of oil a day and better-than-expected Canadian GDP data, which came out at 0.5% in July when it had only been expected to rise by 0.3%, both supported a Canadian dollar recovery.

Growth figures released on Friday from Canada unexpectedly showed the economic recovery was on a stronger path than had been originally expected.

Despite this positive data it is unlikely to satisfy cynical investors that consistent growth will be seen from Canada moving forward.

As CIBC Market’s analyst, Jeremy Stretch commented, the GDP data helped lessen fears the Bank of Canada (BoC) would have to lower interest rates from their already low 0.5% level.

Such a move would weaken the loonie by reducing inflows of capital seeking yield.

Nevertheless, concerns about the Canadian economy in the mid-term remain, according to CIBC Economics.

“The medium-term outlook looks increasingly challenging, threatening our modest 1.7% growth forecast for Q4 and a similar pace expected in 2017. Research released by CIBC economics in the past week suggested that the manufacturing recovery will be shallower than previously expected, given the lacklustre response by C$-sensitive firms in adding capacity and expanding payrolls,” said Stretch.

The BoC is expected to remain on the “sidelines” however as a result of a fiscal spending drive, which will see increased family benefits cheques, and therefore increased consumer spending, which it is hoped will bolster economic growth.  

However, CAD came under pressure last week after BoC Governor Poloz said the BoC might have to cut interest rates or introduce another round of stimulus to help growth.  

Recent inflation data came in flat and below expectations, so the threat of a rate cut from the BOC to help lift inflation remains live.

In the week ahead the data to watch for the Canadian dollar includes Employment stats, which are expected to show 10k jobs were added to the economy in September, and the Ivey PMI, a general economic activity index.

Pound Under Pressure as May Signals Hard Brexit

GBP is trading in the red on Monday the 3rd August with currency traders reacting to confirmation by the UK’s Prime Minister May that Article 50 of the Lisbon Treaty will be triggered before the end of March 2017 which will begin a two-year negotiation process to leave the EU.

While clarity is welcomed, it appears that traders sold GBP on May’s tough stance on the nature of negotiations.

The Government appears keen to make immigration a red line in negotiations which will likely mean the UK loses access to the European single market.

The freedom of movement of people between members of the single market is a fundamental cornerstone of the agreement.

The imposition of tariffs on UK imports by Europe, and potential loss of financial passporting, would likely have a negative impact on economic growth over coming years.

The Government also said it would introduce a Great Repeal Bill which would remove the 1972 European Communities Act and convert all existing EU legislation into UK law on the day of departure from the bloc.

The Pound's Outlook: Strong Economy vs Headwinds of Brexit

The UK economy continues to defy pre-referendum predictions that it would weaken substantially in the case of a Brexit, and this continues to keep the pound well anchored in its current 1.14-1.20 range.

Friday’s UK Services Output data resoundingly beat forecasts of 0.1% by rising 0.4% in July, the month after the referendum.

Unicredit’s UK Economist, Daniel Vernazza argued the data was a strong positive sign for growth since Services Output has a major impact on the economy.

“Services output accounts for almost 80% of GDP and today’s number suggests the UK economy was much stronger than we had initially expected in the immediate aftermath of the vote,” said Vernazza.

Other data released by the Office for National Statistics (ONS) on Friday, revised up growth in Q2 to 0.7%, from 0.6% previously, which is also, remarkably, above the long-term average of 0.5-0.6%.

Overall, longer-term the Unicredit economist is sceptical about whether the economy can continue to lay such ‘golden eggs’:

“Today's services output release for July suggests the risks to even our upward-revised forecast are now to the upside, but importantly it’s still early days.

“Looking ahead, we expect the UK economy to slow materially, with GDP growth of 0.2% in 2017, as it faces a lengthy period of heightened uncertainty ahead,” he said.

Indeed, many believe it is not until Article 50 is triggered that Brexit will become an economic reality, with more impact on the economy.

Whilst Unicredit has an upbeat, short-term take on the data which infers pound strength, Citibank’s analysis focuses more on Brexit negotiations as a driver of sterling, which it concludes is likely to lead to weakness.

“The current consolidation in sterling is likely to give way to lower levels.

“GBPUSD triggers stops below 1.3000 overnight as the unit remains highly sensitive to UK – EU trade negotiations later this year,” said CIBC.

They also fear a ‘Hard Brexit’ devaluing sterling.

“As time has progressed, the likelihood of a so-called ‘hard-Brexit’ has increased.

“That situation would involve giving up single market access for control over immigration.

“While the Bank of England can’t offset the long-term growth implications of such a scenario, it is increasing the chances that the MPC decides to take rates down to its effective lower bound of 0.10% in the coming months.”

Most analysts still expect a move from the BOE before the end of the year, and this continues to cap sterling gains.

The main hard data releases in the week ahead for sterling come in the form of September Manufacturing, Construction and Services PMI’s on Monday, Tuesday and Wednesday respectively.

Manufacturing is expected to fall to 51.2 from 53.3, Construction to 49.0 from 49.2 and Services to 52.0 from 52.9.

Manufacturing and Industrial Production on Friday, Oct are also key metrics to follow.