Pound Sterling’s attempt at a recovery has been stopped in its tracks by after the release of strong Canadian data while the outlook is dominated by the Bank of Canada's rate meeting on Wednesday the 19th.
The Pound’s steep fall eased on Monday after traders decided all of the recent bad news regarding Brexit had probably now been priced into the valuation.
GBP/CAD’s recovery potential was however limited data showing the continuing popularity of Canadian securities amongst foreign investors, which supported CAD.
Foreign securities purchases totalled 6.24BN in August, ahead of a forecast 5.23BN.
The next big event for the currency pair is the Bank of Canada's rate meeting on Wednesday, October 19.
The current implied probability of the BoC cutting interest rates at the meeting is only 3%, according to Standard Chartered’s Thomas Costerg, citing the recent run of strong data:
“The BoC was likely comforted by the recent improvement in Canadian data, particularly in the trifecta of GDP, exports, and employment; recent surveys should also have been encouraging, especially the improving Q3 BoC business survey."
Nevertheless, the Standard Chartered sees one cut in 2017 as likely - as do CIBC Capital Markets.
Most analysts think the BoC will strike a neutral or dovish tone (dovish means desiring lower interest rates) at the meeting.
This could weigh on the Canadian Dollar and offer the Pound some recovery potential.
The new rules governing mortgage lending are likely to take centre stage.
The Bank introduced the rules to cool the overheating housing market.
Concerns that they may be too oppressive, however, only have a tenuous basis in fact according to NBF Bank who estimate only 7% of borrowers will be impacted by the new rules.
From a technical perspective, the GBP/CAD pair has entered a range-bound box pattern, which could breakout in either direction.
Whilst a break lower is more probable given the dominant downtrend, we cannot dismiss a breakout higher, either, especially if BOC are more negative about the outlook than expected.
Commentators are particularly pessimistic on growth forecasts and have noted how the BOC’s forecasts for the US economy – a major influence on the Canadian economy – were overoptimistic at 2.0%, which is 0.5% higher than the actual 1.5% so far achieved.
The government’s fiscal push has not translated into growth yet, either, or the kind of big infrastructure and investment spending required to push growth, and analysts will be searching for more data and insight in relation to this from the BOC.
Continued anaemic growth will place more pressure on the BOC to start printing money again.
As far as exact targets go, we estimate that a break below 1.5920 would see a continuation down to 1.5860 as a minimum and a breakout higher, above 1.6080, would confirm upside to 1.6140 at the level of resistance from a major trend-line.
Less ambivalent is Scotiabank’s Saun Osborne, who is bearish as long as the exchange rate remains below 1.66.
“Broader trend signals are weak and the pound’s inability to recover more substantially from the significant losses seen earlier this month spells more weakness ahead, we think,” commented the strategist in a recent report