Pound-to-Canadian Dollar Rate Forecast For the Week Ahead: Risk of Breaking Below Channel Support

- GBP/CAD at key make-or-break level with bias to further weakness

- The main release for the Pound in the week ahead is PMI data 

- For the Canadian Dollar the key events are February GDP and a speech from governor Poloz 

canadian dollar concept flag 1

© COSPV, Adobe Stock

The Pound-to-Canadian Dollar exchange rate is quoted at 1.7691 at the time of writing, having been as high as 1.80 earlier in the month. The declines come amidst broad-based selling of the Pound which leaves a number of exchange rates now looking vulnerable to reversals lower. 

Indeed, our studies suggest GBP/CAD can be counted amongst them now the exchange rate has reached the bottom of the rising channel it has been in since September 2017; it could very well break down out of the channel in the week ahead.

Given the strength of the down move and the fact the pair is technically in a short-term downtrend, we expect a break below the lower border of the channel and a volatile extension lower.

Of course there is equally the possibility of a rebound from the support provided by the lower channel line at the current lows, however, there are no signs yet of this happening and the short-term trend established during April is bearish as confirmed by the sequence of descending peaks and troughs on the 4hr chart (see below).

A break and close on a daily basis below the lower channel line at 1.7600 would confirm a breakdown, or alternatively, just a break below 1.7530 would confirm more downside.

A breakdown out of the channel would be expected to extend as far down as the height of the channel extrapolated down from the break. This is represented by the grey vertical line on the daily chart above labeled 'X'.

Using 'X' as a guide we estimate that a breakdown would probably fall to at least as low as the 200-day moving average (MA) situated at just below 1.7100, which is our next downside target for the pair.

The MACD momentum gauge in the lower pane of the chart is also bearish as it has just broken below the zero-line suggesting the trend is now officially down, and it looks like it is forming a zig-zag pattern down with an unfinished second leg (red line on daily chart above), inferring the possibility it will extend lower to complete the second leg. This supports the bearish forecast for the exchange rate.

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Data and Events to Watch for the Canadian Dollar

The main release for the Canadian Dollar (also known as the Loonie) in the week ahead is Canadian GDP in February, released on Tuesday, May 1 at 13.30 GMT.

Consensus expectations are for a 0.3% result, up from the -0.1% recorded in January. 

High GDP suggests higher interest rates and therefore a stronger Canadian Dollar because higher interest rates tend to attract greater inflows of foreign capital drawn by the promise of higher returns.

Another key event for the Loonie in the week ahead is the speech by Bank of Canada's (BOC's) governor Poloz on Wednesday at 19.30.

Poloz has adopted an optimistic stance on the economy recently due to improved growth prospects, although a major risk factor remains concerns about a trade war with the US.

The May 1 deadline for completing the revision of the NAFTA agreement is only days away, and positive news on that front i.e news that large tariffs are not going to be levied on Canadian exports is likely to reinvigorate the Loonie as it will remove a major risk factor from the outlook.
Poloz's recent comments suggest a bias now to raising rather than cutting interest rates.

"The economy is close enough to its potential that we’re in that space where it’s more a question of the timing and at what pace do interest rates move towards more normal levels,” Poloz told a committee of lawmakers last Wednesday.

If he reiterates a similar position next week the Loonie may gain on the back of his comments reinforcing the technically bearish outlook for GBP/CAD.


Data and Events to Watch for the Pound

The main data release for the Pound in the week ahead will be the release of April Service and Manufacturing PMIs out at 9.30 on Thursday and Tuesday respectively.

PMI is short for Purchasing Manager Index, and PMIs are survey-based indicators which are seen as useful forward-indicators of economic activity. The market consensus appears to be for expecting a rebound in Services in April after the drop in March, which was put down, mainly to bad weather. Services PMI in April is expected to rise to 53.5 from 51.7 and Manufacturing to 54.8 from 55.1.

The Pound may be especially sensitive to the results this week owing to the lazer-like focus currency markets are currently placing on UK economic data. 

Sterling fell by over a percent against both the Euro and US Dollar in the wake of economic growth data which revealed the UK economy grew a mere 0.1% in the first three months of 2018, growth that has virtually killed any prospect of an interest rate rise being delivered by the Bank of England in May.

"UK Q1 GDP disappointed Friday by growing only 0.1% q/q - the worst quarterly growth rate since 2012 - casting doubt whether the Bank of England is going to hike next week, as almost all expected just a few weeks ago. We think it is a close call now and think the PMIs for April are going to be extremely important for the Bank of England's decision," says Kristoffer Kjær Lomholt, Senior Analyst with Danske Bank.

Will the incoming data surveys point to a pick-up in activity, or will they suggest the economic slowdown is more entrenched?

From the market expecting a hike with almost 100% certainty a few weeks ago, the probabilities have now fallen to circa 50% after comments from the governor of the BoE suggested there might be a delay owing to the downturn in data.

The possibility of a delay in raising rates led to a drop in the Pound which is highly sensitive to interest rate expectations.

Expectations of higher rates tends to lift the Pound and vice versa for the lower rates. This is because higher rates tend to attract greater inflows of foreign capital drawn by the promise of higher returns and this increases demand for the Pound.

"We may see an outsized market reaction from any surprises, as they tilt markets toward or away from a May BoE hike," say investment bank TD Securities in a note covering the week ahead.

The bullish market forecasts for Manufacturing are not shared by some, including Philip Shaw, an analyst at Investec, who sees risks to April's figure both from the sharp appreciation in the Pound and the heightened talk of a trade war in early April.

Shaw does, however, share the market's more upbeat forecast for Services, which he expects to rebound by three points to 54.7 due to the temporary impact of bad weather dissipating.

More generally the lack of market-moving data besides PMIs means the weak could be a slow one for the Pound.

"Domestically, next week may represent a lull before the storm provided by the 10 May Bank of England Inflation Report and MPC announcement," says Shaw. "Bearing in mind Mark Carney’s comments last week about mixed data, the decision may be more finely balanced than we had envisaged."

"But we judge that the MPC will believe that the tight labour market will override the softer than expected short-term inflation environment," concludes the analyst.

The other major event in the week ahead for the Pound is the UK local elections on Thursday, May 3 at 1.00 GMT.

The main way it could impact is via Brexit expectations, such as for example if there is a surprise outsized vote for the anti-Brexit liberal democrats, which might be Sterling positive.

If the Conservatives win a larger-than-expected majority it could impact on Sterling in two ways depending on how investors interpret the result.

It could be negative for Sterling because the Conservative party is probably the party most in favour of the 'harder' forms of Brexit.

At the same time is could be positive for the Pound if it is interpreted as showing increased confidence in Theresa May's leadership, suggesting a reduction in the influence of the far right within the party, and therefore more likely to deliver a pragmatic rather than ideologically driven Brexit solution.

A Labour landslide would be negative for Sterling, according to TD Securities.

"While polls have consistently been pointing toward big Labour wins/Conservative losses at next week's local elections, with GBP being vulnerable to political developments, we may see a negative market reaction to any "Labour landslide" headlines. Vote counting only begins on Friday, so results should trickle out later that day," say TD Securities.

It is not unusual for voters to use the local elections to express dissatisfaction with the reigning government so a labour victory would not be particularly surprising or necessarily especially indicative of future voting patterns.

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