Pound / Canadian Dollar Week Ahead Forecast: Attempting to Hold 1.7235

• GBP/CAD risks shifting to the upside
• Well supported near 1.7154
• May have scope to hold above 1.7235
• With Fed, Ukraine elevating USD/CAD
• UK, CA CPI data in focus for GBP/CAD

Image © Pound Sterling Live. Adobe Images.

The Pound to Canadian Dollar rate has recovered the 1.72 handle and could now seek to hold above this level if the Federal Reserve (Fed) policy outlook and geopolitical risks keep the USD/CAD rate elevated over the coming days, although UK and Canadian inflation data will also be important influences.

Sterling entered the new week trading near 1.7250 against the Canadian Dollar after benefiting last Thursday and Friday from a rally in U.S. exchange rates and a risk averse mood among investors, which lifted the influential USD/CAD rate sharply and boosted GBP/CAD along the way.

“We continue to favour looking to fade USDCAD gains to the 1.2750/1.28 range. The week ahead contains more data than the past few days, with Canada reporting Dec CPI and Retail Sales figures,” says Shaun Osborne, chief FX strategist at Scotiabank.

“An upside surprise for Canadian inflation will likely bolster developing pricing around a 50bps move from the bank at its early March meeting. Note that BoC Deputy Governor Lane speaks mid-week,” Osborne and colleagues said in a Friday research briefing.

Much about the Pound to Canadian Dollar rate’s performance during the week ahead is likely to depend significantly on price action in USD/CAD and whether it attempts to recover the nearby 1.28 handle or if it instead slips lower into a retest of a so-far-solid technical support level located at 1.2664.

• Reference rates at publication:
  GBP to CAD spot: 1.7243
• High street bank rates (indicative): 1.6640 - 1.6760
• Payment specialist rates (indicative: 1.7088 - 1.7157
• Find out about specialist rates and service, here
• Set up an exchange rate alert, here

Above: GBP/CAD shown at daily intervals with major moving-averages indicating likely areas of technical support for Sterling while Fibonacci retracements of September 2021 downtrend denote possible support and resistance.

GBP/CAD tends to closely reflect the relative performance of USD/CAD and its Sterling counterpart GBP/USD, but often also demonstrates a positive correlation with USD/CAD and so could be likely to benefit from any renewed attempt at rising back to 1.28 or above.

“We note USD/CAD has recently been more sensitive to changes in expectations for FOMC rate hikes. That said, further USD/CAD upside is limited given the already rich pricing for FOMC tightening. In our view, 1.2830 remains a key resistance level to watch,” says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia.

Friday’s USD/CAD rally helped the Pound to Canadian Dollar rate climb above the 61.8% Fibonacci retracement of its September 2021 downtrend for only the fourth time, which has previously acted as a form of technical resistance for Sterling but could now act as a form of support early this week.

However, if the U.S. Dollar weakens or the Loonie strengthens enough to push USD/CAD into a retest of support near 1.2664 then it would potentially pull GBP/CAD back toward its 200-day moving-average at 1.7154, which successfully arrested several intraday bouts of losses last week.

“Canada’s January inflation report will be the headline event next week after another acceleration in the U.S. numbers. The Canadian CPI year-over-year growth rate is expected to have ticked down to 4.7% in January,” says Josh Nye, a senior economist at RBC Capital Markets.

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The most significant downward risk for USD/CAD and GBP/CAD is this Wednesday’s release of Canadian inflation figures for January, which could potentially weigh on both exchange rates if the market consensus for a tentative new year easing of price pressures proves to be misplaced.

“Price growth is still being biased higher by so-called ‘base effects,’ or comparisons with a year ago when prices were lower and the pandemic economic impact was more severe. But price pressures have been broadening out into more goods as well,” Nye and RBC colleagues warned on Friday.

However, if Wednesday’s data does show Canadian inflation pressures easing in January then it would stand in stark contrast to the inflation picture over the in U.S. where annual price growth reached 7.5% last month, leading financial markets to become significantly more “hawkish” in expectations for Federal Reserve interest rates, which also helped to lift USD/CAD and GBP/CAD last Thursday.

A moderation of inflation pressures would keep the annual pace of price growth in line with Bank of Canada (BoC) forecasts and leave financial markets with little if any reason to grow more hawkish in their expectations for Canadian interest rates this year, likely acting as a headwind for the Loonie.

Such an outcome would be very likely to support the Pound to Canadian Dollar rate and even more so if UK inflation figures due out earlier in the same Wednesday session were to be seen heading in the same direction as those from the U.S.

Above: USD/CAD shown at daily intervals with 100 and 200-day moving-averages as well as Fibonacci retracements of 2022 rally indicating likely areas of technical support for USD/CAD.

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“It’s no surprise that inflation in both economies is moving in the same direction. This usually happens because the economic cycles in the US and the UK tend to be closely aligned and as inflation in both economies is influenced by the same global factors. But it is striking how over the past year inflation in the UK has followed inflation in the US with a lag of about six months,” says Paul Dales, chief UK economist at Capital Economics.

Capital Economics team forecast that UK inflation likely remained around 5.4% last month but also warned on Friday that “there is a good chance of an upside surprise,” following last week’s U.S. figures and any such outcome might be likely to reinforce market expectations for an accelerated series of interest rate rises from the Bank of England (BoE) later this year.

“FOMC minutes and comments from Fed policy makers late in the week will be the focal points for markets, however. Bullard, Mester and Waller are all voting hawks on the FOMC this year and may reinforce expectations of a “big bang” start to the Fed’s tightening cycle,” says Scotiabank’s Osborne.

While Wednesday’s inflation figures are the highlights for Sterling and the Loonie, the market could also pay close attention to public appearances from various Federal Reserve officials as well as minutes from the bank’s January policy meeting due for release on Wednesday evening, which could also be supportive of GBP/CAD and the influential USD/CAD pair.

In addition, developments relating to Ukraine are potential upside risks for both USD/CAD and GBP/CAD following Friday’s allegation from Washington that an extension of Russia’s 2014 military incursion into the country could be likely to begin around mid-week.

Above: USD/CAD shown at daily intervals alongside GBP/CAD.