The Canadian Dollar could be propelled higher this week as growth and inflation data hit the market, while Brexit politics dominates the Pound. The charts are mixed.
A triangle pattern on a price chart forms when oscillating prices taper to an ever narrower point, as illustrated in the idealized graphic of a triangle below.
Such a pattern is probably forming on the Pound-to-Canadian-Dollar price chart at the moment.
Above: GBP/CAD shown over three and half month time horizon.
Prices could break out in either direction but there is a marginally higher chance of the break occurring in the same direction as the trend prior to formation, which is higher in the case of GBP/CAD.
The pair is also moving in an ascending channel, which supports the possibility of further upside evolving. In addition, a golden cross has recently formed, which is when the 50-day moving average crosses above the 200-day moving average. This is normally a very bullish signal.
We expect a breakout higher with a move above the 1.7282 December 8 highs, leading to a continuation up to a target at 1.7500.
Nevertheless, this is not a conviction call as the look and feel of the chart also suggests a greater chance of a breakout lower rather than higher, although it is too early to turn bearish on the pair yet, in our view.
Also remarking on the pair is Shaun Osborne, chief FX strategist at Scotiabank, who acknowledges that prices are is still trending sideways.
"GBPCAD is somewhat softer but still essentially range bound," Osborne writes in a recent note. "This certainly supports the idea of a market that is deep in consolidation mode but might also leave the door open for a renewed rally above 1.7340/50."
Nevertheless, despite being bullish longer-term, Osborne flags "near-term downside risk for the cross."
"We remain longer-term bulls here but feel the GBP risks slipping back somewhat in the next few weeks as the late 2017 rally corrects. We prefer to buy dips in the 1.65 area from here."
Data and Events for the Canadian Dollar
Inflation Data on Thursday at 13.30 GMT is the most significant release of the week for the Canadian Dollar.
The consensus is for a 2.0% rise in inflation in November when compare with the same period one year ago, when inflation rose by just 1.4%. On a month-on-month basis, inflation is seen rising by 0.2%, up from the 0.1% reported for October.
Inflation is important because of its impact on central bank interest rate policies which, asides from being the greatest driver of currency prices, are designed to keep inflation on an even keel.
Most analysts appear to think the market is being a little over-optimistic in expecting 2.0% in November, with TD Securities forecasting 1.9% and Trading Economics a much lower 1.3%.
A dramatic undershoot in line with Trading Economics' forecast would see the Loonie tumble and Pound-to-Canadian-Dollar rate rise.
GDP data out on Friday at 13.30 is also important because it measures the rate at which the economy is growing and a faster-growing economy can have an impact on inflation and therefore, interest rates.
It can also attract more inflows of foreign capital too, which is good for a currency, because outside investors want a 'piece of the action'.
GDP is forecast to rise 0.2%, like it did in October, which would see the Canadian economy on course for a strong year in 2017.
"The latter (GDP) should show a 0.3% advance, providing a solid anchor for Q4 growth, and we look for CPI to firm to 1.9% due in part to base-effects," says TD Securities.
Bank of Canada governor Stephen Poloz was extremely optimistic on the economy during his speech last week and this prompted Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management, to forecast a strong week ahead for the Canadian Dollar.
"We are looking for stronger numbers all around that could extend the rise in the currency," Lien writes, in a recent note.
Data and Events for the Pound
Front and centre in the week ahead for the Pound will be Brexit politics, with the cabinet set to discuss goals for phase two of talks in a key meeting requiring ministers to define the “end state” relationship the UK will pursue with Europe
"With a cabinet reshuffle imminent some may sound more conciliatory," says Canadian investment bank TD Securities in its weekly outlook.
Wednesday the UK parliament will vote on a further amendment to the Brexit bill, which is expected to put a firm departure date into legislation.
However, analysts are sceptical the government will get enough votes to push this through as opposition to the idea is pretty strong.
Rebels may be emboldened by their successful defeat of the government last week which, having passed “Amendment 7”, requires parliament to be given a “meaningful vote” on whether to accept the final Brexit agreement struck with Brussels.
From an economic data perspective, the main events are current account and business investment data, due out on Friday at 9.30 GMT, both of which are indicators that are peculiarly sensitive to Brexit and can impact the Pound.
The current account measures the difference between money flowing into and out of the UK. It most recently showed a deficit of £-23.2 bn.
Economists forecast this figure to fall to £-21.3 bn for the third-quarter. If the actual number falls even further then it may lift the Pound as it will show the deficit is narrowing faster than expected.
Business investment is expected to rise 0.2% for the third quarter, the same as it did in the previous three months. A greater increase would be positive for Sterling as it would suggest businesses are not holding back new projects as much as has been feared. Brexit uncertainty has been a key influence on business investment of late.
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