The Canadian dollar was hardly affected by the weak economic data reported last week by Statistics Canada. The inflation rate of 0.4% m-o-m in April missed analysts’ estimates of 0.5%, while the retail sales declined 0.2% m-o-m in March, against the market’s expectation of 0.2% growth. On the contrary, the Pound was unable to gain ground despite a three-and-a-half-year high CBI (Confederation of British Industry) industrial order expectations data. Thus, contradicting the economic data, the GBPCAD pair lost about 100 pips in the past few trading sessions to trade near 1.7500. Two factors kept the GBPCAD pair bearish: the upcoming election in the UK and the oil rally. We expect a deeper decline in the GBPCAD pair on the basis of the arguments provided below.
In order to reduce oil inventories, last week, Russia and Saudi Arabia decided to back the extension of the production cut agreement signed between OPEC and other oil-producing nations last year. While the market was expecting an extension until the end of 2017, both countries supported an extension until March 2018. That surprised the market, thereby leading to a rally in the price of crude oil.
Larry Berrman, a currency analyst at BNN, believes that the Canadian dollar has bottomed out. His argument is based on the improved outlook for oil, which is one of the major export revenue earners for Canada.
Another argument made by analysts in favor of a Canadian dollar rally is the considerable increase in the short positions in the futures market. The optimistic view for oil may trigger short covering thereby leading to a rally in the Canadian dollar.
The upcoming election in the UK is expected to increase the volatility in the Pound. The Labour party is closing in on the Conservatives as per the latest poll results. As soon as the election was announced, the Pound rallied on the assumption that the Conservative party, headed by the British Prime Minister May, would receive a thumping majority in the election. However, the gap has narrowed to 9 points, with the Conservatives leading the Labour by 43 to 34. Following the release of the poll results, the sentiment towards the Pound has turned sour. Thus, fundamentally, we anticipate the GBPCAD pair to remain weak in the days leading to the UK election.
The GBPCAD pair has been on a decline after facing resistance at 1.7640. The RSI indicator is descending after hitting the overbought level represented by a reading of 70. On the lower side, minor support exists at 1.7270. Major support is at 1.6720. Thus, we can expect the pair to reach minor support in the short-term.
As a Forex trader, we would consider opening a short position in the GBPCAD pair near 1.7530, with a stop-loss order above 1.7640. If the prediction goes true, we shall book our profit near 1.7270.
In order to reap returns from the analysis, in the binary market, we may purchase a put option contract valid for at least seven trading days. To keep the risk lower, we shall enter the trade when the exchange rate of the GBPCAD pair is about 1.7530.
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.
