The Pound has begun the week on a shaky note. It is declining against most of the G10 currencies, including the Canadian dollar. The decline can be construed as profit booking, following a phenomenal run of about 800 pips in the past two weeks. However, as explained below, there are some other reasons for the downtrend. We expect the GBPCAD pair, which is trading at about 1.7400 levels, to go down further in the week ahead.
Last week, the UK Office for National Statistics (ONS) reported a 0.5% q-o-q GDP growth in the fourth quarter of 2017. It was higher than the third-quarter growth of 0.4% and better than analysts’ estimates of 0.4%. Overall, the UK economy grew by 1.8% in 2017. The IMF had forecast a GDP growth of 1.1%, while JP Morgan analysts’ estimates stood at 1.6%.
Barclays had issued a gloomy forecast of 0.7%. The overwhelmingly positive GDP data pushed the Pound upwards. However, it did not last long because the reported GDP growth was the lowest since 2012. The GDP growth in 2016 was 1.9%. The construction industry has contracted for the third quarter in a row. Similarly, the agro sector contracted 0.4% in 2017.
Unlike what was expected by the market, the sixth round of NAFTA negotiations, which ended yesterday, has brought a glimmer of optimism among all the parties. Negotiators even managed to finalize the chapter on anti-corruption. Steve Verheul, Canada’s chief negotiator, said the current round of talks has been more constructive than past rounds. The US lawmakers acknowledged Verheul’s opinion and said that they are optimistic about arriving at a successful deal. However, the US negotiators cautioned that none of the parties should stick to a specific deadline.
After a briefing from US Trade Representative Robert Lighthizer, US representative Dave Reichert said “There’s just an air of optimism.”
Commodity analysts, in the meanwhile, are bullish on crude oil, which continues to hover around $70 per barrel. So far in January, the Brent has gained about 6.3% to trade at about $69.88. It is the biggest rise since January 2013. There are three main reasons for the oil rally. Firstly, the US government favors a weak dollar, which has an inverse relationship with crude oil.
The US Treasury Secretary Steven Mnuchin recently said that the Trump administration is favoring a weak currency. Secondly, the market is concerned that the unrest in Iran may result in a sharp rise in the cost of crude oil. Thirdly, the production cut agreement between OPEC and Russia is having a positive influence on the prices. Canada, and the Canadian dollar, is expected to benefit from higher crude prices. Therefore, the above facts suggest a short-term decline of the GBPCAD pair.
The historical price chart indicates that the GBPCAD pair has broken the support level at 1.7460. Furthermore, the stochastic indicator has started to descend from the bullish zone. Therefore, we are expecting the currency cross to decline further.
To gain from the predicted decline, we wish to go short in the GBPCAD pair near 1.7420. To avoid huge losses, we would place a stop-loss order above 1.7520. If the currency pair moves southwards as anticipated, then we will book our profit near 1.6930.
Likewise, we may purchase a put option through the trading platform of a reliable binary broker. The option contract should remain active until February 8. Furthermore, the GBPCAD pair should be trading near 1.7420 for us to consider purchasing the put option.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
