The Pound to Canadian Dollar conversion is now locked in a downtrend as the Bank of Canada has started raising interest rates whilst the Bank of England is still some months off following suit.
Concerning the technical outlook, what levels can we expect to see over coming days?
GBP/CAD has moved below some key support lines such as the 1.7100 neckline of the previous double bottom pattern and the 200-day moving average (MA).
Peaks and troughs are moving lower and we expect them to continue.
Nearer-term we see a high chance of Monday (July 17) being a down-day after the two weak up days on Thursday and Friday.
Research shows that when you get two weak bullish days in the midst of a downtrend the third day has a better than 50% chance of being a down-day, in fact on EUR/USD it was shown to occur with a 66% probability.
Beyond that a move below the previous low at 1.6352 would probably confirm a continuation of the downtrend to a target at 1.6200 initially.
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Data for the Canadian Dollar
The main data dump for CAD is on Friday July 21, when CPI and Retail Sales are released.
Broad inflation is only expected to rise by a muted 1.1% in June from 1.3% in May, which itself was an undershoot of the 1.5% expected.
Even a fall to 1.1% would see inflation remain within an average range historically.
Core inflation, on the other hand is in deep decline, and is currently only at 0.9%.
A further decline would raise alarm bells ringing and see the Canadian Dollar weaken.
Despite all the hawkish talk coming from the BOC they cannot ignore a further fall in core inflation and this could make them retreat from their current hawkish stance and rethink a possible rate hike.
Data for the Pound
The standout release for Sterling in the week ahead is June Inflation data which is out at 9.30 BST on Tuesday July 18.
The release is important because it impacts on the decision making of the Bank of England (BOE), which in turn is a major driver of the Pound.
Inflation has risen steeply after the Pound weakened following the referendum, which had the consequence of pushing up the prices of imports.
Inflation in May stood at 2.9% year-on-year (yoy: ie compared to May 2016), and 0.3% month-on-month (mom).
The consensus amongst analysts is that it will remain at 2.9% in June yoy but rise at a lesser 0.2% mom.
However, Canadian Investment Bank TD Securities think the market is being too dovish and forecast a higher 3.0% rise in inflation.
TD expect Core inflation to come out at 2.6% which is the same as the market.
A rise in the cost of utilities is likely to be the driving force behind higher broad inflation and stable core.
“Inflation is likely to have continued its march upward in June, in part due to utility price increases. Core inflation, meanwhile, is likely to have remained stable.”
Nor do TD see this as the “peak for inflation” as core could rise 1 or 2 basis points and headline could rise to the “min-3% range”, which would, “head up the debate about a (single) rate hike later this year.
Incidentally the divergence between slowing average earnings in the UK and rising inflation is probably the root cause of the slowdown in the high street or “consumption” as economists like to call it.
The drag on growth from people spending less money is likely to keep the hawks at the BOE in check and limit any possibility of a rate hike.
We know Carney for one won’t change his view until the “trade-off” facing the MPC “continues to lessen” by which he means the trade-off between slowing growth and rising inflation.
Which brings us on to the other major release of the week for Sterling – Retail Sales on Thursday, July 20 at 9.30.
The market is currently being very optimistic about the gains expected in June.
They see headline Sales rising 2.6% yoy – which is a big jump from the previous 0.9% print; and Core increasing 2.4% from May’s very much lower 0.6% rise.
The market also expects a monthly rise of 0.4% for headline and 0.5% for core from -1.2% and -1.6% respectively in May.
This turnaround appears hugely optimistic from both our and TD Securities perspective, and seems to have little logic backing it up.
TD are of the opinion that Sales will not rise by anything (0.0%) mom in June rather than the 0.4% suggested by the market – we agree.
The picture below showing historical Retail Sales data shows a breakdown in the prior up-trend which gives the outlook a definite bearish hue.
The look and feel of the chart betokens a more negative print next Thursday than a more positive, which would also make more sense given the fall in real earnings.
BK Asset Management’s Kathy Lien, however, thinks there is a chance of a better-than-expected print:
“The smaller decline in shop pricesand the uptick in BRC retail sales monitor points to stronger numbers that should help rather than hurt the GBP/USD rally,”
Whilst this fits with the bullish technical outlook we, nevertheless, retain a negative bias.