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Sterling / Canadian Dollar Rate: Downside Pressures Forecast to Ease

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The Pound to Canadian Dollar exchange rate could be reversing trend according to our technical studies.

Our observation is based on the downtrend in GBP/CAD hitting a new low of 1.6232 and then rebounding to its current 1.6476 level.

Although it is too early to say for sure, the bounce could be the beginning of a reversal, with a break above the 1.6503 highs confirming a continuation of the correction up to an initial target at 1.6600.

GBPCADJuly31b

The pair had reached the lower line of its descending channel before bouncing, and from here it may very well correct back up to the upper channel line at around 1.6700 eventually.

The MACD momentum indicator is flat, indicating a lack of bearish momentum which supports to a certain degree the possible interpretation of more upside on the horizon.

Analyst Shaun Osborne at Scotiabank in Toronto agrees with the view that downside pressures on GBP/CAD might finally be easing.

"The bearish trend appears to be weakening as we note the moderation in DMI’s hinting to a shift in the balance of risk," says Osborne in a note dated July 31.

He adds, "the multi-month descending trend channel has been broken and GBPCAD has pushed above its 9 day MA (1.6343). We note the potential for near-term gains toward the 21 day MA around 1.65. Support is expected at 1.63."

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Data for the Canadian Dollar

The Canadian Dollar has been supported by a combination of the probability of the central bank increasing interest rates – which is always positive for a currency – and positive growth data, as reflected in recent GDP data which showed a 0.6% rise in May when experts had only estimated a 0.2% increase instead.

Markets will be looking for confirmation the economy is maintaining this trend.

The main releases in the week ahead all come on Friday when the Trade Balance and Employment data are scheduled for release at 13.30 BST.

The Trade Balance is forecast to deepen to -1.35bn in June from -1.05bn previously.

Employment is expected to increase by 10k and the Unemployment Rate is forecast to stay at 6.5%.

The Canada Raw Materials Price Index has already been released on Monday afternoon and has shown prices falling by -3.7%, which was lower than the -3.2% consensus expectation and is bearish for the Loonie.

Data, Events to Watch for the Pound

The Bank of England polciy meeting is the main release for the Pound in the week ahead.

The meeting, scheduled at 12.00 BST on Thursday, August 3 is not expected to result in a change of policy but the message from the Bank in the accompanying statement will be key.

Also note that the Bank is releasing its latest set of economic forecasts which presents markets with a good deal of material to focus on. As we note here, Sterling could well see volatile trade.

“There has been a lot of speculation that the BoE is about to change tack. But, for now, policy still seems set to remain on hold,” said Lloyds Commercial Banking’s, chief economist, Rhys Herbert, who forecasts a 6-2 split in favour of keeping interest rates unchanged.

Canadian investment bank TD Securities agree with the view that the BOE will vote 6-2 to stay on hold:

“While the BoE took a more hawkish stance in June with a 3 MPC members voting for a hike, we look for a 6-2 vote this time as the uber-hawk Forbes departs and most top-tier data has surprised to the downside since Haldane’s hawkish speech in June.”

However, BMO Capital reckon a 5-3 vote is more likely and in their opinion such an outcome would benefit Sterling. The argument forwarded by BMO Capital's Greg Anderson is that the Bank is keen to defend the value of the Pound in order to quell the recent rise in inflationary pressures.

Recent strong GDP data is probably not going to be enough to encourage a rate rise, despite coming out up by 0.3% on the previous month – against 0.2% forecast – and 1.7% higher on an annualized basis as this is still well below the rate of inflation which is circa 2.7%.

RBS’s chief economist notes how the dominant Services sector is holding overall growth up.

He adds that there are two schools of thought about this, with the first composed of optimists, for whom, “the strength of the service sector, representing 80% of the economy, shows the underlying resilience of growth with services now 2.3% bigger than a year ago,” whilst pessimists argue that the, “falls in production output are being masked by a short-lived expansion of services that’s doomed to fall victim to the real income squeeze.”

The other major releases for the Pound in the week ahead are Manufacturing, Construction and Services PMI’s released on Tuesday, Wednesday and Thursday respectively, all at 9.00.

PMI’s are currently broadly range bound around the 53-4 level for all three sectors and they are expected to remain around those levels.

Services is forecast to rise by a mere basis point to 53.5, Manufacturing to stay at 54.3 and Construction to dip to 54.0 from 54.8.

Any result over 50 is indicative of expansion, whilst anything below 50 shows overall contraction of the sector.

GBPJuly31Services

 

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