The established uptrend in GBP/CAD is expected to continue into the 1.78s.
The Pound-to-Canadian Dollar exchange rate is in an established uptrend which our technical studies suggest could well extend higher.
Looking at the structure of the market, via the charts, we believe a break above the 1.7644 January 25 highs would invite further buying interest and thus provide confirmation of such a continuation to an upside target at 1.7850 at the level of the 2017 May 5 highs.
Old highs and lows often provide lines in the sand on charts where prices stall, pull-back or even reverse trend.
The reason is psychology: traders who may have bought close to the old highs, like the May 5 highs, but where then proven wrong when the market declined, are normally so relieved at a second visitation of the level they bought in at, and the prospect of breaking even after having been in the red for so long, that they liquidate rather than risk holding on in the hope of higher prices, and being proven wrong a second time.
While we are bullish on Sterling’s prospects, analyst Shaun Osborne with Scotiabank sees a more consolidative tone to GBP/CAD. “Bullish momentum indicators have faded from overbought territory,” says the analyst.
While near-term could see subdued price action, Osborne believes that over the medium-term (roughly the next few weeks) Sterling will extend higher.
“The medium-term trend remains bullish and we await a break of the recent range roughly bound between 1.7300 support and resistance in the mid-1.76s. We highlight the absence of any meaningful resistance levels ahead of 1.7850,” says Osborne.
Data and events for the Canadian Dollar
The main release in the week ahead is employment data which is out on Friday, February 9 at 13.30 GMT.
We have just seen the US Dollar rising strongly after the release of positive employment and wage data – especially wage data – so the potential is there for CAD to do likewise.
The chart below shows that the Canadian labour market is already quite strong as unemployment has been falling at a steepening pace.
Image courtesy of tradingeconomics.com
The current consensus expectation is that Friday’s data will show that the economy has added 78.6k new jobs in January, from -1k in December.
Despite this, the unemployment rate is forecast to rise a basis point to 5.8% from 5.7% in the previous month.
The other major release for CAD is the trade balance on Tuesday, February 6, which is forecast to come out at -2.3bn in December, from -2.54bn previously.
An unexpected narrowing of the deficit or surplus in the trade balance would be positive for the Canadian Dollar as it would suggest exports outweighing imports, and therefore demand for CAD – to fund the purchase of Canadian exports – outweighing demand for other currencies to purchase imports.
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Data and Events to Watch for the Pound
The main event in the week ahead for the Pound is the Bank of England (BOE) rate meeting on Thursday, Feb 8 at 12.00 GMT.
Analysts do not expect a change in interest rates so the focus instead will be on attempting to guess when the next change will come by analysing voting patterns, the wording of the statement and governor Carney’s verbal responses to questions in the press conference after.
If the evidence points to a rate rise getting more likely then the Pound will rise; if not then it will fall.
Brexit risks continue to cause uncertainty about the outlook and weigh on the BOE’s reaction function, and given those risks have not changed substantially, little change is expected, and possibly a muted response from Sterling.
The other main event is the release of the BOE’s Quarterly Inflation Report at the same times as the meeting, and given inflation is one of the main factors which lead to higher interest rates, and interest rates are positively correlated to the Pound this too could impact on Sterling.
If economic growth and inflation forecasts are revised higher expect Sterling to catch a bid.
“We have long-argued that interest rates would rise somewhat faster, and sooner than markets expecting. Recent comments by Governor Carney offer tentative support to this view and suggest that February’s Inflation Report could strike a more hawkish tone than is anticipated,” says Paul Hollingsworth economist at Capital Economics.
Inflation is currently 3.0% and has been caused mainly by the depreciation of Sterling since the EU vote in June 2016. The BoE has said it is willing to allow inflation to overshoot for a limited period before tackling it, however, Hollingsworth thinks they may start to show an impatience, given the stronger-than-expected performance of the economy. Such a change would be expected to lead to a modest rise in Sterling.
Other significant data in the coming week include the services sector PMI out on Monday at 9.30 and Halifax house price data for January out at 8.30 on Tuesday. Industrial, manufacturing and trade data round off the week.
Markets are expecting a reading of 54.3 from Monday’s service sector PMI – anything better will likely set Sterling on a strong footing at the start of the new week, while disappointment could add to the bearish tone.
“While most of the early data was suggesting we could see the services sector run flat, the weak prints on both the manufacturing and construction PMIs last week now points to the Services PMI declining from 54.2 to 53.2, versus a consensus of 54.0, though we suspect that may likely drift lower by the time of release. The January PMIs so far suggest the adjustment in the housing sector persisted into January while more of the demand was coming from external sources rather than domestic, all suggesting no reason the Services PMI should outperform the softer January data,” says a note on the matter from TD Securities.
The Halifax data may garner interest because last week’s Nationwide data showed an unexpected surge in house prices in January, which lifted Sterling, and the market will be looking to the Halifax data to corroborate it.
Friday, meanwhile, sees the release of manufacturing and industrial production and the trade balance for December, all out at 9.30.
Markets are eyeing monthly industrial production to have slid 0.9% in December with the manufacturing production number showing an increase of 1.2%.
Trade data should show a balance of -£11.60BN as the UK continues to import more than it exports.
With regards to the above, the manufacturing data is expected to have the most impact on Sterling.