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Canadian Dollar vs. the Pound Week Ahead Forecast: Trend Turning Higher After Three Up-weeks in a Row

Canadian Dollar

- Three white soldiers Japanese candlestick pattern heralds new uptrend

- Yet early days still for GBP/CAD and analysts cautious

- The main event for the Pound is the meeting of the Bank of England; for CAD it is housing starts

The Pound-to-Canadian Dollar rate ended last week trading at a spot price of 1.6995 on the interbank market, a whole cent higher than its 1.6894 close in the week before that.

The rise in the strength of the Pound reflects reports that Brexit negotiators are getting closer to agreeing a Brexit deal, combined with a deteriorating outlook for NAFTA negotiations between Canada and the US and poor employment data from Canada, which weighed on the Canadian Dollar.

The weekly chart is showing signs of a technical reversal after posting three up-weeks in a row and forming a Japanese candlestick pattern called a 'three white soldiers', which is a sign of a bullish reversal in the exchange rate.

Although the pattern is not an excellent example of the type because not all three weeks are of a similarly strong length and strength as would be the case in a better example, it is nevertheless a sign the pair is probably reversing.

The bullish reversal is not surprising given the pair has completed an abcd pattern down from the March highs with leg c-d closely matching a-b in length.

GBP to CAD weekly

The pair will now probably continue rising to the upper boundary of the descending channel it has been moving down in since March, situated at roughly 1.7200. A break above the 1.7117 highs would provide confirmation of such a continuation.

Yet we also see the possibility of a pull-back in the week ahead before the next leg higher given the bearish candles at the recent highs - the last two days of last week formed two bearish doji/shooting star patterns which are a negative sign and could be indicating a correction is on the cards.

GBP to CAD

Analysts at Scotiabank are wary of jumping on an uptrend and see conflicting signals. The chart is showing bullish indications in the short-term but the "primary downtrend remains intact at this point and we continue to look for limited GBP gains overall but these are signals that warrant attention," says Shaun Osborne, Chief FX Strategist at Scotiabank in Toronoto. "A sustained push above channel resistance at 1.3320 (currently) would imply more scope for the pound to strengthen."

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The Canadian Dollar: What to Watch

The outlook for the Canadian is strong but still dependent on the outcome of NAFTA negotiations. According to the latest guidance negotiators have until the end of the month to reach an agreement -  if they fail, it is likely to weigh on the Loonie.

The Bank of Canada (BOC) has been relatively upbeat in its assessment of growth and the outlook for interest rates. Out of all the G10 it is second only to the Federal Reserve in terms of hawkishness of stance. BOC deputy governor Wilkins said she may see reason for the Bank to speed up raising interest rates. The BOC says the economy is running at full potential, a boast not many others are making at the moment.

Further, more aggressive rate hikes would be positive for the Loonie since higher interest rates attract greater inflows of foreign capital drawn by the promise of higher returns.

After the fireworks of last week, the week ahead promises to be more quiet as the main release is only Housing starts for August out on Tuesday, which is forecast to show a rise to 210k from 206 in July.

Canadian investment bank TD Securities are even more optimistic seeing an even greater rebound than the market consensus:.

"We look for a sizeable rebound in August housing starts to 225k, slightly above the 6-month average and following a 206k pace in July. This would be consistent with the trend in building permits which have maintained a steady uptrend since late 2017."

An upbeat tone to the data is unlikely to make waves in the FX market but it might move the Loonie marginally if surprising.

 

The Pound: What to Watch

It is a busy week for UK data with several key data releases, and the Bank of England (BOE) meeting scheduled to finish on Thursday at 12.00 B.S.T.

The BOE raised interest rates by 0.25% at their August meeting but they are not expected to continue raising them in September.

Brexit uncertainty remains a key risk factor preventing them from going ahead - unless a deal is struck by Thursday, which seems a little unlikely even under the most optimistic scenarios.

"As for the BoE, which is scheduled to announce policy on Thursday of next week, we do not expect many new developments. The BoE raised its Bank Rate 25 bps to 0.75% at its August meeting, and further increases seem unlikely to be considered unless or until Brexit uncertainty is resolved," say analysts at global investment bank Wells Fargo in a recent client briefing.

The September meeting does not include a press conference or quarterly inflation report further reducing the chances they will use it to announce any changes in policy.  

"The BoE last raised interest rates in August, lifting them above 0.50% for the first time since 2009. It is widely anticipated to hold rates unchanged at 0.75% next week. With no press conference and quarterly inflation report at the September meeting, the Pound may struggle to get much reaction from the BoE’s decision," say brokers XM in a preview of the event.

Another key event for the Pound in the week ahead is wage data which is scheduled for release at 9.30 B.S.T. on Tuesday, September 11.

Wages are leading indicator of growth and inflation pressures and a higher-than-expected increase would probably result in a rise in the Pound as it would increase the probability of the BOE raising interest rates.

Consensus expectations are for wages to rise by 2.5% in July  from 2.4% previously (plus bonus). The Unemployment rate is forecast to remain unchanged at 4.0%.

Industrial and manufacturing production figures for July are out at 9.30 on Monday and are both forecast to show 0.2% growth from the previous month.

"Among the key releases will be industrial output figures, which will likely be closely watched for any clues that Brexit uncertainty is affecting manufacturing sentiment," say Wells Fargo.

Trade data is also out in the week ahead with the trade balance forecast to show a marginal widening to 11.75bn  July, and Non-EU balance to show an increase to -3.30bn from -2.94bn previously, when the data is released at 9.30 on Monday.

Monthly GDP data at 9.30 and The National Institute of Economic and Social Research (NIESR) GDP mates at 14.00 are also out on Monday and could impact on the Pound if they present a negative outlook for growth.

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