GBP/CAD Week Ahead Forecast: Suppressed by Resilient Loonie

• GBP/CAD consolidating losses near 1.58 
• Could struggle above 1.59 in short-term
• Suppressed by resilient CAD, softer GBP 
• BoE in focus ahead of UK & CA CPI data

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The Pound to Canadian Dollar exchange rate has stabilised following a nine percent decline since Russia began its faltering conquest of Ukraine, although it could struggle for momentum upon any recovery above 1.59 in the days ahead due to a resilient Loonie and softer Sterling. 

Sterling had retreated from the Loonie for 10 consecutive weeks and fallen by almost a double-digit percentage before volatile stock and commodity markets lifted the all-important USD/CAD rate above 1.30 last week and helped GBP/CAD to stabilise above the 1.58 handle in the process.

The Pound to Canadian Dollar rate was unable to sustain a brief foray back above the 1.60 level, however, and this has further cultivated the appearance of a mere consolidation playing out on the charts following a lengthy run of declines rather than the beginning of any recovery.

To the extent that this is right it would likely leave GBP/CAD suppressed beneath that level in the days ahead in the absence of a possibly unlikely bout of underperformance by the Canadian Dollar, which has been among the most resilient of the major currencies to the recent strength of the U.S. Dollar.

“Sterling underperformance is our strongest G10 FX view at the moment,” says Michael Cahill, a G10 FX strategist at Goldman Sachs. 

Above: Pound to Canadian Dollar rate shown at daily intervals alongside GBP/USD and with Fibonacci retracements of February decline indicating possible areas of short-term technical resistance to any recovery by Sterling. 

“While the UK faces a similar trade-off as other major central banks between slowing growth and well-above-target inflation, the BoE has chosen to place a relatively bigger weight on the growth outlook while still relying on supply-side factors to bring inflation down to target. While the merits of this approach are subject to debate, what matters for markets is it is de facto a weak currency policy,” Cahill and colleagues said in a Friday research note.

GBP/CAD benefited last week when the U.S. Dollar lifted USD/CAD above 1.30 but Sterling’s lead over the Loonie was fractional and it would likely need the Canadian Dollar to weaken significantly in order to advance meaningfully this week due to a multitude of homegrown risks facing Sterling. 

These include Monday’s parliamentary testimonies from Bank of England (BoE) policymakers, which might be likely to remind the market of the extent to which it may be overestimating the prospect of further increase in UK interest rates over the coming months. 

“We've revised down our Sterling profile in line with the deterioration in the growth backdrop and the squeeze to incomes from higher inflation and taxes,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets, who says GBP/CAD is likely to end the current quarter around 1.60.

Above: USD/CAD shown at daily intervals alongside GBP/CAD. Click image for closer inspection. 

“The Bank of Canada and the Federal Reserve’s tightening paths over the rest of the year are likely to be close enough to preclude any material impacts on the loonie, leaving broad USD sentiment as the main driver of movements,” Stretch and colleagues said in a review of CIBC’s forecasts last week.

Wednesday’s release of April inflation figures from the UK and Canada are the highlight of the week ahead once beyond Monday’s Monetary Policy Report hearing and the danger is that these too have a further suppressive effect on the Pound to Canadian Dollar rate. 

Some measures of consensus suggest Wednesday’s data will reveal that UK inflation rose from 7% to 9.1% in April, with the non-energy and food measure of core inflation rising from 5.7% to 6.2%, although there’s a risk that Sterling will be unable to capitalise on such an outcome. 

This is because the BoE has recently indicated that it may be unlikely to lift UK interest rates as far as markets expect in the months ahead and due in part to the bank’s expectation that some of this inflation pressure will eventually undermine itself by squeezing incomes and curbing spending power. 

Above: Pound to Canadian Dollar rate shown at weekly intervals alongside USD/CAD.

“Higher inflation is starting to become more of a negative for GBP performance as the cost of living crisis is resulting in a sharper slowdown in UK growth. At the same time recent comments from BoE officials have on balance dampened the likelihood of the BoE responding to higher inflation with larger rate hikes,” says Lee Hardman, a currency analyst at MUFG.

“The CAD strengthened following the release of the last Canadian CPI report for March. The report reinforced expectations for the BoC to deliver another larger 50bps hike on 1st June. Another upside inflation surprise in the week ahead could provide some much needed support for the CAD after USD/CAD broke back above the 1.3000,” Hardman also said in a Friday research briefing. 

Wednesday’s UK figures are followed hours later by the release of Canadian inflation data for April, which is the highlight of the week ahead for the Loonie and would likely act as an additional dampener for GBP/CAD if it suggests that domestic price pressures escalated further last month

This is in part because the Bank of Canada lifted its interest rate in a larger-than-usual 50 basis point increment in April, taking it back to 1%, and has not ruled out following up with similar sized increases in the months ahead.