GBP/CAD loaded technicals and event catalysts - DailyFX top trade for next week
The week ahead is loaded with high level event risk that can feed – or disrupt – major themes. Representing a key theme of monetary policy with a serious technical backdrop, GBPCAD is a pair to watch closely.
GBPCAD, Bank of Canada, Inflation and Technicals Talking Points
- Monetary policy is a dominant fundamental theme for the forex and global financial markets, with interest rate expectations soaring
- Despite rate hikes from both the Bank of Canada (BOC) and Bank of England (BOE), there is a serious divergence in forecasts for the Sterling and Loonie
- GBPCAD has dove sharply over the past six weeks, and now major technical support will put the top event risk to the test next week
While there have been some major fundamental waves to rise for FX traders this past month – many competing to dictate our direction and volatility – I believe there is currently a prevailing driver heading into the new trading week and that is monetary policy. With inflation pressures pushing multidecade highs and further exacerbated by the Ukrainian-Russian war, the pressure on central banks has increased dramatically. Many policy groups consider themselves to be behind the curve in balancing price pressures which is leading markets to speculate on aggressive tightening campaigns ahead while some central banks are even openly admitting to this future. There will be a lot of rate speculation around the major currencies this week, but I’m particularly interested in the combination for GBPCAD. From the UK, we are only due inflation statistics, but swaps are pricing in approximately 136bps of additional hikes through the rest of the year having already hiked three times. That is hawkish by most accounts, but seemingly not as ambitious as what the market expects from the BOC which is seen hiking 50bp at its meeting on Wednesday and 216bps through the rest of the year with just one hike behind us thus far. There is contrast here to be sure, but speculation tends to over-extend markets.
Major Events for UK and Canada from DailyFX Calendar with Central Standard Time (Daily)
In evaluating a situation like the event risk around GBPCAD and how it may impact the market, it is important to not assume an outcome. If I were just looking at the daily chart of the pair below, it would seem the path of least resistance is a reversal of the past six-week bear trend with the clearance of the 20-day moving average and recent range high around 1.6480. However, if the scheduled event risk exacerbated the appeal of the Loonie relative to the Pound, it could certainly push the pair back to 1.6300 and potentially below it. In considering the scenarios in the data, I will place greater emphasis in my own assessment on the Bank of Canada decision on Wednesday. A 50bp hike is priced in, and it is likely to be met. However, if the group doesn’t reinforce expectations for subsequent meetings to follow this same pace, the Canadian currency could give back some of its charge.
Chart of GBPCAD with 20-Day SMA (Daily)
AIncreasing the time frame, a weekly chart speaks to some of the statistical extremes GBPCAD has established over the past month. The seven-week slide is the most consistent and aggressive since August 2019. The momentum behind that previous bear wave looks a lot like what we have seen established recently with similar measures of stretch from some of the more applicable indicators. Take for example the ‘Percent B’ indicator which shows the relation of spot price to the Bollinger Bands™ (using the two standard deviation around a 20-week moving average). We have certainly pushed outside the envelope extreme. For a different view of similar analysis, the 10-week standard deviation which is below has pushed to highest into seen since July 2017 – in the wash after the Brexit volatility. It is always possible that volatility edges even higher, but that grows increasingly difficult to sustain over time.
Chart of GBPCAD with 20-Week SMA, Bollinger Band™ Width and 10-Week Standard Deviation (Weekly)
As extreme as the short- to medium-term picture of GBPCAD may be, it is worth pushing the picture to an even higher time frame (monthly) to reinforce the reality that we don’t have to reverse. While this time fame makes clear that there is a major trendline support stretching back to 2010, we have generally experienced congestion from this pair for the past six years. A stretch down to 1.6000 or even 1.5750 would still stand within the lows of 2016 to 2019 without looking like a true ‘break’. Previous exceptional tumbles over the span of a month have proved one offs that charge at least short-term reversals, but there are even more instances where such big moves fit into more progressive declines over an extended period of time. How do we deal with this potential for either direction? Watch how the fundamentals land and the markets interpret their implications via price action.
Chart of GBPCAD with 20-Month SMA and 1-Month Rate of Change (Monthly)
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