Pound-to-Canadian Dollar Rate Week Ahead Forecast: Stuck in the Middle

Canadian Dollar black background

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- GBP/CAD falls back into range

- Outlook neutral as trading plum in middle at 1.70

- Main event for the Pound is Brexit vote; for Canadian Dollar inflation data

The Pound-to-Canadian Dollar exchange rate is trading at 1.7022 at the start of the new week, virtually unchanged from a week ago.

The Canadian Dollar rose last week along with the price of oil, to which it is correlated, but its gains were tempered by evidence of a homegrown slowdown.

Sterling rose as Parliamentarians continued showing their disdain for a disorderly Brexit by forcing an amendment to a government financing bill curbing its ability to raise taxes in the event of a no-deal.

GBP to CAD weekly chart

Technically, GBP/CAD is back in the middle of its longer-term trading range between 1.66 and 1.75 and the outlook for the pair remains uncertain as there does not appear to be in any dominant overarching trend.

GBP to CAD daily

The daily chart offers no additional clues. The pair had been falling from the 1.74 highs ever since the beginning of the year but although it started to establish a short-term downtrend, the sudden violent recovery on Friday was so strong it suggests a possible reversal may be underway.

The location of the 50-day moving average (MA) at the top of the recovery is, however, an obstacle which will need to be cleared before the pair can go higher.

GBP to CAD 4 hour

The unclear direction of the trend is most visible on the 4-hour chart which shows how the pair started to form a progression of lower highs and lows indicative of a short-term downtrend following the December peak. The sudden strong reversal higher on Friday, however, broke the pattern of peaks and troughs and climbed above the last higher low before the pair based - normally an indication of a reversal.

It is too early to tell whether the short-term trend has reversed and so as things stand the highly contrary signals lead us to a adopt a ‘wait and see’ neutral outlook for now.

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The Canadian Dollar: What to Watch

The main release in the week ahead for the Canadian Dollar is probably inflation data out at 14.30 GMT on Friday, January 18.

Inflation impacts on interest rates which compensate lenders for time-value erosion and interest rates impact on currencies, which tend to rise on the back of higher interest rates because they attract capital inflows.

The December inflation data out on Friday is expected to show a -0.4% decline, the same as in November. On a yearly basis, it is expected to show a rise of 1.7% - a slowdown from 1.8% previously.

If the expected slowdown in inflation is confirmed by the data it is likely to have a negative impact on the Canadian Dollar and encourage a recovery in GBP/CAD.

Last week's Bank of Canada meeting saw policy makers execute something of a policy U-turn after they shelved plans to raise interest rates, effectively, in the words of the governor, “taking itself out of the rate hike game” in 2019.

A lower-than-expected inflation result on Friday will reinforce this view and consequently weigh on the Canadian Dollar.

The other key driver of the Canadian Dollar is the price of oil, especially the main Canadian variety, Western Canadian Select (WCS).

WCS has recovered in price to $45 recently after the government of Alberta decided to institute 'OPEC’ style supply cuts, and whilst these will run out mid-year they seem likely to keep prices buoyant until then, which is likely to be a positive for CAD.

 

The Pound: A Big Week for Brexit Politics

By far the most important event in the week ahead is the vote on Theresa May’s Brexit deal, scheduled for Tuesday 15, at 19.00 GMT. The outlook definitely favours the government to lose, and it is more a question of ‘by how much’ rather than ‘whether’.

The Pound's reaction will therefore likely depend on the size of the loss, and what comes next. If the loss is large - defined by a 100 or more MPs - as some analysts believe, it might signal the death of the government’s deal and could prompt a knee-jerk move lower in Sterling.

"Very few commentators expect the deal to pass, so the move in GBP would likely be limited on that news alone," says Jordan Rochester, analyst with Nomura. "But we would be looking at the size of the defeat to understand whether a repeated vote could get over the line."

The expected defeat would probably lead to a vote of no-confidence in the government, called by the Labour Party with Labour leader Jeremy Corbyn telling the BBC's Andrew Marr on Sunday that he would call the vote soon. But we don't see the government losing such a vote as the DUP and Conservative party would unite to defend their hold on power.

"We’d expect the government to win a vote of no confidence as turkeys rarely vote for Christmas," says Nomura's Rochester.

We think the government will ultimately rework the Brexit deal and bring it back to parliament for a second airing, and there is talk of some EU concessions being made available to help the deal cross the line on a second vote.

While there is a majority in Parliament who are committed to avoiding a 'no deal' Brexit, as proven by last week’s finance bill vote, there is not necessarily a majority to command an alternative plan. That said, a report in the Sunday Times reports Downing Street uncovered a bombshell plot by senior MPs to seize control of Brexit negotiations and sideline the prime minister. At least two groups of rebel MPs are plotting to change Commons rules so motions proposed by backbenchers take precedence over government business, upending the centuries-old relationship between executive and legislature.

This in effect could see Brexit delayed, cancelled or another Norway-style Brexit delivered. All scenarios lead to a softer Brexit which is good for Sterling. However we would be seriously worried for the long-term stability of UK politics if such a coup were to take place. 

Last week's reports that a large portion of Labour Party MPs are open to supporting the deal if they can secure their own changes is a significant shift in the debate we believe: if these MPs secure some changes to the deal, a softer Brexit is in sight, which represents an all-out positive for Sterling.

Last week's report the government is considering a delay to the Article 50 process is also notable in that it suggests government ministers are aware that all alternative Brexit scenarios that would follow the failure of May's deal, would need more time to formulate and execute. While the reports were officially denied by 10 Downing Street we believe this a case of where there is smoke, there is fire.

“Perhaps the best-case scenario for the Pound, barring the deal passing in parliament, would be a delay to the article 50 process. This decision would have to be agreed by the EU, however they are likely to do so, with the Pound set to appreciate due to the removal of the pressure of hitting the 29th March deadline for exiting the EU,” says Michael Brown, Senior Analyst at Caxton FX.

Brexit aside, the two main economic releases in the week ahead are inflation out on Wednesday and retail sales on Friday. Of the two, analysts think the latter is most likely to have the greater impact on Sterling.

“With the Bank of England not expected to raise interest rates unless Parliament approves a smooth Brexit, the inflation data is unlikely to have much impact in currency markets. Retail sales on the other hand could see a stronger response by traders as it’s a better gauge of UK growth momentum,” says Raffi Boyadjian, an analyst at broker XM.com.

Retail sales are forecast to show a -0.7% fall in December according to consensus estimates. If so the Pound could fall due to a drop in expected Q4 growth.

Wednesday’s inflation data, meanwhile, is expected to show a rise of 0.2% month-on-month (Mom) and 2.2% compared to a year ago, when it is released at 9.30, with little changed from the previous print. The higher the result the better for the Pound and vice-versa.

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