British Pound to Canadian Dollar Forecast: Limit to Weakness May Have Been Reached

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The GBP to CAD exchange rate has lost its upside impulse after peaking at roughly the 1.8753 highs. Is this the end of the multi-week recovery?

  1. Pound to Canadian dollar exchange rate at 1.8561 at start of the new week
  2. US to Canadian dollar exchange rate at 1.2912
  3. Euro to Canadian dollar rate at 1.4624

GBP/CAD's correction off the May 10 highs has stabilized over the past four trading sessions, buoyed by support from the 50-day moving average.

Technically speaking then, the pair may have reached its downside limit, with the possibility of the up-trend from the April lows resuming.

The MACD, a momentum indicator has risen above zero indicating a change of trend from down to up. 

For confirmation of more bullishness a break above the 1.87 highs would help.

These are the highs of a completed A-B-C correction, so a break above them would indicate a bullish reversal in market structure, and provide a strong up-signal.

Such a break would be expected to rise to the next target at 1.8857 and the March highs.

GBPCADMay14

FX strategist at Scotiabank Shaun Osborne, remains bullish for the pair after identifying a rounding reversal pattern at the lows:

“GBPCAD’s technical picture remains potentially positive. The 'rounded low', which formed through April and the minor, counter-trend dip in the GBP over the past week give the appearance of a classic “cup & handle” reversal formation.

"The minor drift back in the market after the initial rally is typically followed by a more dynamic phase of (bullish) market movement.”

Osborne forecasts more upside for the pair, with a break above the 1.8800 highs predicting a move up to 1.91/92.

Oil-inspired Support to Wane

The Canadian dollar is highly positively correlated to oil, which means that it strengthens and weakens in line with the price of oil.

This is due to oil being a major export of the Canadian economy.

Recent wildfires in Alberta almost wiped out a whole mining town, including 2,500 houses, and halted a major share of production.

This actually supported the Canadian Dollar in the previous week, however, the fires have now been contained and some of the wells have already come back online.

Oil is close to the key 50 dollar per barrel level where analysts argue a lot of shale oil production in the US which has shut-down due to being unprofitable becomes profitable again, and is therefore likely to see more shale coming online and increasing supply.

It’s therefore likely oil prices will struggle to mount a meaningful recovery above the 50 level unless production remains subdued and US shale producers decided to stay offline due to the risk of another dip below the key 50 level.

British Pound Fundamentals: Brexit or no Brexit?

The pound’s exchange rate is currently driven predominantly by the risk of the UK leaving the EU.

The number of people saying they want to stay has increased from a week ago, but more have also said they want to leave too.

The average poll result according to the Financial Times poll tracker is showing ‘stay’ in the lead at 46% with ‘leave’ at 43%.

Most large bookmakers are saying there is a 75% probability of a the referendum returning a win for Remain, or 1/3, whilst the chances of leaving they estimate at between 25-30%.

The outlook for central bank policy is also now a factor increasingly affecting the pound.

Thursday’s Bank of England Quarterly Inflation report downgraded growth expectations but - interestingly - upgraded inflation forecasts for 2 years ahead, and there is a possibility investors are underestimating the chances of the BOE raising interest rates earlier than expected (assuming a referendum win for ‘Remain’).

Capital Economics’s Vicky Edwards read this as a “message to the markets” that the Bank of England was closer to hiking rates than previously. If this suggestion takes root and starts to shape expectations of an early interest rate rise, the pound could gain in the week ahead.

Data Hotspots in the Coming Week

Core Retail Sales on May 20 is the main release for the Canadian Dollar in the week ahead. It is expected to slow and contract by -0.5% in March, from a previous 0.2% reading. Such a decline would negatively impact on the loonie as it would depress the already fragile economic outlook and raise the possibility of the Bank of Canada having to reduce interest rates to help support growth.

The other major release is Core inflation which is forecast to drop to 0.1% from 0.7% in March. Again the loonie is vulnerable to a below-expectations figure.

For the pound, the week starts with UK April inflation data on Tuesday, with analysts forecasting no-change from the 0.5% previous reading. A rise would support sterling whilst a fall weaken it.

March Average Earnings (plus Bonus) are out on Wednesday May 18, and are expected to moderate to 1.6% from 1.8% previously.

Again a rise would support the pound and vice versa for a drop.

April Retail Sales are forecast to rise 0.6% mom on Thursday. Whilst less significant it will help economist model expected Q2 growth.