Pound-to-Canadian Dollar Rate Forecast for the Week Ahead: Targetting 1.72

- GBP/CAD could fall down to a target at 1.7200

- The main event for the Pound in the week ahead is the Bank of England rate meeting on Thursday

- The main economic release for the Canadian Dollar is labour market data out on Friday

canadian dollar concept flag 2

© Viv Idrange, Adobe Stock

The Pound-to-Canadian Dollar exchange rate is trading at 1.7520 on the interbank market at the time of writing, still some way below the 1.76s being quoted in the previous week. 

The exchange rate's decline has come as a result of continued growth fears pressuring Sterling lower, which has contrasted with Canada where the outlook for the economy, if anything, appears to have improved.

From a technical perspective, the overarching trend for the exchange rate is now down and our studies suggest it will extend. The weekly chart, in particular, has changed from looking quite bullish after the pair broke above the May 2017 highs, to now looking quite bearish after breaking back below them.

At the same time there are signs which have led us to be a little more cautious in our bearish prognostications.

The pair looks like it has probably completed an 'abcd' pattern on the daily chart (see below) which suggests downside could be limited and the pair could even start to recover - at the very least temporarily - as it has already started to do, so far, on Monday morning.

The c-d wave probably does not have much lower to go before it completes because the a-b and c-d waves of abcd patterns are usually of similar length. 

Once c-d finishes the market will probably rotate and start moving higher, as shown in the example of an abcd on GBP/JPY below:

Yet overall the trend remains bearish, as shown by the falling momentum, which has broken below the zero-line and so there is still a risk the abcd may fail and the trend could extend lower.

As such a break below the 1.7325 level would confirm for us a continuation down to the next target at 1.7200, which is on the way to a possible eventual bearish target down at 1.7100, as established in our previous week's forecast here, based on the width of the channel.

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Data and Events for the Canadian Dollar

The main release for the Canadian Dollar in the week ahead is Employment Data, out on Friday, May 11 at 13.30 GMT.

The unemployment rate is forecast to remain at 5.8% in April, the same as the previous month and Employment change is expected to show a rise of 17.4k.

The better the employment data the stronger the Canadian Dollar is likely to get because a strong labour market is a pre-requisite to raising interest rates, and higher interest rates are positive for a currency as the tend to attract greater flows of foreign capital.

Another key event is a speech by Deputy Governor of the Bank of Canada (BOC) Lane at 20.00 on Monday, May 07.

Recent comments from BOC governor Poloz had been seen as positive overall so if Lane echoes those sentiments CAD may rise at the start of the week.

Data and Events to Watch for the Pound

The main event in the week ahead for the Pound is the Bank of England (BOE) interest rate meeting on Thursday, May 10 at 12.00 GMT.

Whilst previously expectations had been for the BOE to raise interest rates by 0.25% at the meeting, data showing a slowdown in growth and commentary from the governor of the BOE, Mark Carney, which brought into question the necessity of a May hike, have dampened expectations more recently.

Official market expectations now stand at roughly 20% for a hike, and Sterling has decline alongside these fading expectations. A recent survey of economists held by Bloomberg found that none of them now expect a rate hike on Thursday.

Therefore - we would expect a substantial boost was the Bank to defy expectations and raise interest rates. In theory, the Pound could retrace much of the losses witnessed over recent weeks.

The BOE's inflation report is also out at the same time, and will show the Bank's latest forecasts for the economy and can provide insight into how the Bank may formulate policy in the future.

If it expects inflation and growth to rise, for example, that could be bullish for Sterling as it will imply more rate hikes, and higher interest rates are usually positive for a currency.

We would expect guidance to be important for Sterling - what does Carney's assessment of the recent growth slowdown, is it temporary or does he believe it to be more entrenched? Will the BOE confirm further interest rate rises are indeed necessary over coming weeks? These are where we see the big story for Sterling lying.

A more upbeat assessment of the economy and the outlook could certainly turn sentiment towards Sterling for the better, while a downbeat tone could allow the recent sell-off to extend.

"We expect clear evidence of a sustained rebound in GDP growth to pave the way for next rate hike to in November 2018, followed by two more hikes in 2019," says a preview note from Berenberg.

"Our baseline case is that next week will mark a three-month postponement to rate increases, with the next 25bp hike occurring in August," says Phillip Shaw, an economist from Investec.

Data releases are second-tier in nature. On Tuesday, May 08 at 8.30 large mortgage lender Halifax releases its house price index, which is forecast to show a decline of -0.3% month-on-month in April.

Wednesday sees the release of the British Retail Consortium's (BRC) Sales Monitor, which is forecast to show a -0.7% fall in April compared to April in 2017.

Thursday, May 10 sees the release of the Royal Institute of Chartered Surveyors (RICS) House Price balance just after midnight, which is expected to show a -1.0% fall in April.

Also out on Thursday is Industrial and Manufacturing Production at 9.30 with the former expected to show a 0.1% rise mom, and the latter a -0.2% decline.

Finally, the UK trade balance is out on Thursday and is forecast to show the trade deficit widening to -11.40bn in March.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here