Pound-to-Canadian Dollar Rate Forecast for the Week Ahead

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After breaking higher GBP/CAD inches closer to key May highs at 1.7840 as we maintain our overall positive technical stance on the exchange rate.

The Pound-to-Canadian Dollar exchange rate is rallying as the dominant short-term uptrend advances.

Most recently it was in a sideways range which broke above the range highs and extended higher with the pair peaking at 1.7780 last week before pulling-back down to the current level at 1.7670.

In our previous technical forecast - based purely on our studies of the technical setup of the market - we said the pair had been forming a bullish flag pattern on the daily chart which would extend higher to a target at the May highs of 1.7840, and we retain this view. 

Flag patterns normally resolve in a breakout higher in which they move as far as the 'pole'  extrapolated higher from the base of the flag square, as shown in the diagram below:

A break above the May highs, as well as the 200-week moving average at 1.8041, could confirm a major new bullish phase for the pair.

It is possible to read a double bottom chart pattern into the price-action since June 2016.

Double-bottoms look like the letter 'W' and form at market lows,  they herald a reversal from bearish to a bullish trend.

A break above a level called the neckline at the level of the intervening peak is usually required for confirmation of more upside, the neckline, in this case, is at the level of the May highs at 1.7840.

Such a break would then probably see the exchange rate move higher by a minimum of the height of the pattern multiplied by the golden mean (0.618) extrapolated higher from the neckline.

This gives an upside target of 1.9030.

The 200-week MA at 1.8041 is a formidable obstacle in the way of the exchange rate reaching its target and its possible it may stall of reverse at it, so for stronger confirmation of more upside traders should look for a break above 1.8200 to confirm a clearance of the moving average as well.

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Data and Events to Watch for the Canadian Dollar

The main release for the Canadian Dollar (Loonie) in the week ahead is GDP data for the 4th Quarter out on Friday, March 2, at 13.30 GMT, which is forecast to show a 2.0% rise in Q4 compared to a year ago when it showed a rise of 1.7%.

December GDP is also expected to show a 0.1% rise month-on-month from November.

The general consensus is that Canadian growth will continue to rise but that NAFTA risks are casting a shadow over the future, which is weighing on the Loonie.

NAFTA stands for the North Atlantic Free Trade Agreement and allows tarriff-free trade between the USA, Mexico and Canada. It is currently being renegotiated after the US argued the current deal was not in their best interests. There is a possibility the new deal could be negative for Canadian exports, or worse still that the US could decide to leave NAFTA altogether. 

"In Canada, the week will see the release of fourth-quarter GDP. Monthly readings to date suggest the economy expanded at a slightly faster pace than in Q3. True, trade was likely a drag on the quarter’s total output, as real imports expanded at a faster pace than real exports. That being said, trade’s negative contribution should have been more than offset by an expansion of consumption spending (based on retail data) and a residential construction ramp up (if housing starts are any guide)," says National Bank of Canada (NBF) chief economist and strategist Stéfane Marion.

Stronger-than-expected growth would lead to a rise in the Loonie as it would increase interest rate expectations and higher interest rates tend to drive up currencies by attracting greater inflows of foreign capital, drawn by the promise of higher returns.

Another key release in the week ahead is the Current Account which is forecast to show the deficit narrow to -17.9bn from -19.4bn when it is released on Thursday, March 1, at 13.30 GMT.

The current account is the difference between inflows and outflows to a country (including imports versus exports and income from overseas earnings) and so a deficit, which is indicative of greater outflows, would logically seem to infer negative net demand or a currency, however, this does not appear to be supported by evidence, so even though the forecast is for a narrowing of the deficit, which ought to be positive for CAD, its not certain it will.

Other CAD data includes the budget deficit in December which is expected to show the deficit to narrow from -2.8bn in the previous month when it is released at 16.00 on Tuesday, February 27.

Data and Events to Watch for the Pound

From a fundamental perspective, the most important factor for the Pound in the coming week is the outcome of the extended cabinet meeting held at the Prime Minister's residence at Chequers to heal divisions and decide on a consensus approach to Brexit.

The outcome of the meeting will be crystalised in a speech due to be delivered by Prime Minister Theresa May on Friday, the location and exact time of the speech are yet to be made clear.

The British Pound was seen as one of the better performing global currencies towards the end of the previous week with markets cheering the UK government making progress on their Brexit strategy.

The promise of Conservative party unity on the issue of Brexit is a rare commodity, but this could well be on offer following Theresa May's decision to lock her top team in a room in the English country side and let them out only once agreement had been sought.

Members of Cabinet emerged from the meeting with those on either side of the Brexit divide saying talks were constructive and a unified position had been found.

"GBP is top of the pack by a small margin, as reports suggest the cabinet is closer to agreeing on a unified line on the UK’s post-Brexit relationship with the EU after the Chequers meeting ended late last night," says Adam Cole, Chief Currency Strategist with RBC Capital Markets.

Brexit remains the key story for Sterling and therefore the details of May's speech, and any European response could, therefore, be key.

The issue of UK interest rates will be in focus with the Bank of England's (BOE) Sir John Cunliffe delivering a speech on Monday at 18.00 GMT, in which he may drop hints as to the BoE's stance on monetary policy.

There is now a heightened expectation that the BoE will raise interest rates by 0.25% in May after statements made in the February meeting statement and more recently in front of the Treasury Select Committee indicated BoE members had adopted a more 'hawkish' stance - 'hawkish' meaning members are in favour of raising interest rates at a quickened pace.

If Cunliffe's speech further reinforces a more aggressively hawkish tightening strategy from the bank and a greater chance of a May hike, the Pound will rise, since higher interest rates are supportive of Sterling, because they attract greater inflows of foreign capital drawn by the promise of higher returns.

It is not expected to, however - Cunliffe dissented from raising rates in November and may well still be on the dovish spectrum.

Clearly, if he has become more hawkish it will be a strong indication of voting intentions and push the Pound higher.

"BoE’s Jon Cunliffe is set to speak on Monday following fellow Deputy Governor Dave Ramsden’s scheduled remarks tomorrow.

Given that both dissented against the November rate hike, it will be interesting to see whether they maintain their reservations in the face of the hawkish testimony delivered to the Treasury Select Committee by the Governor Mark Carney and other MPC members," said Investec analysts George Brown and Victoria Clarke.

House price data from Nationwide is out on Thursday at 7.00 GMT and is expected to rise 2.6% in February compared to a year ago and 0.2% from the previous month. Housing leads the economy they say so it is important, but there are not expected to be any surprises in the Nationwide data, so little probable impact on Sterling.

The major economic release of the week is Thursday's release of Manufacturing PMI for February at 9.30 GMT, which is forecast to show a slowdown to 55.0 from 55.3.

PMIs are surveys of key personnel (Purchasing Managers) in a sector and provide a good leading indicator of growth and activity. A result of over 50 indicates expansion and below 50 - contraction.

Construction PMI is out on Friday at the same time and is forecast to come out at 50.7 in February from 50.2 previously.

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