GBP/CAD Week Ahead Forecast: Resistance Near 1.5932 Frustrates

• GBP/CAD set for consolidation around 1.58 short-term
• As technical resistance frustrates rebound near 1.5932 
• USD trend key amid quiet period in UK, CA calendars

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The Pound to Canadian Dollar exchange rate may be in the process of attempting to reverse a steep multi-month decline but it has so far been stymied by technical resistance around 1.5932 on the charts and may now be likely to consolidate its recent gains near the 1.58 handle in the week ahead

Sterling appeared to benefit last week when the Monetary Policy Committee’s Huw Pill and Catherine Mann echoed the Bank of England’s (BoE) message that it would potentially be willing to lift interest rates in larger than usual increments to contain inflation in the months ahead.

But while the Pound to Canadian Dollar rate has retained much of the large gain made following this month’s BoE meeting, it has also thus far been unable to overcome technical resistance around 1.5932 on charts and whether it does so this week likely depends greatly on the U.S. Dollar. 

All currencies are sensitive to the trajectory of the U.S. Dollar but Canada’s Loonie can sometimes appear to be more impacted by it than than most and particularly where the overall trend is shifting, which potentially explains some of the recent buoyancy in GBP/CAD. 

“We continue to feel that its close correlation with stock market trends has overshadowed some more supportive factors—a hawkish central bank, a robust economy and relatively firm terms of trade (even if these trends have moderated somewhat recently)—which might otherwise have lifted the currency,” says Shaun Osborne, chief FX strategist at Scotiabank, in a Monday reference to the Canadian Dollar. 

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of February downtrend indicating various areas of short-term technical resistance for Sterling. Click image for closer inspection.

Canada’s Dollar rose against many major currencies during the week to Tuesday but its gains were tepid at best and especially in light of the April retail sales and May inflation figures that cast the Canadian economy in a stronger light than economists previously perceived.

These figures were an open invitation for a more ‘hawkish’ Bank of Canada (BoC) interest rate policy that might normally be expected to weigh heavily on Sterling and other currencies relative to the Canadian Dollar, although the Loonie’s gains have been limited.

“Spot’s soft-ish close on the week through last Friday puts a tentative top on the USD rally after spot’s rejection of the upper 1.30s in the prior week. But the fact that support around 1.2865 continues to hold the market up suggests very limited, positive momentum behind the CAD at this point,” Scotiabank’s Osborne said on Monday in reference to USD/CAD, which is an important influence on GBP/CAD.  

This was despite financial markets revising up their expectations for the BoC’s July policy decision, which is now expected to see the cash rate lifted by 0.75% to 2.25%, and in a market environment where expectations for other central banks’ were chopped back almost across the board. 

By many analyst accounts this had to do with market concerns about the global economic outlook stemming from Fed Chairman Jerome Powell’s reiteration in congress that it will be difficult to bring down U.S. inflation without disrupting the labour market or harming the U.S. economy. 

Above: USD/CAD shown at daily intervals with Fibonacci retracements of June rally indicating possible short-term areas of technical support for the U.S. Dollar. Click image for closer inspection.

“Indeed, the Fed’s message has now changed. It’s no longer about getting administered rates back to neutral by the end of the year. Instead, it’s all about ensuring that policy rate settings are ‘restrictive’ by the end of the year. That’s quite different from other central bank takes on upcoming rate hikes,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets, who sees USD/CAD rising to 1.33 in the months ahead. 

The U.S. Dollar eased lower against many currencies alongside market-implied expectations for central bank interest rates around the world last week and in contrast to what many analysts would typically expect of it in market conditions where growth concerns are top of mind for investors.

This lends a conspicuous appearance to the Loonie’s inability to capitalise much on last week’s strong Canadian economic data and the related uplift in expectations for the BoC’s cash rate, which may have had something to do with the Canadian economy’s close proximity and links to the U.S. economy.

All things Canada have underperformed and outperformed alongside the U.S. Dollar and economy in the past including this year and last, and to the extent that recent price action reflects a market tide turning against the greenback, it may be supportive of GBP/CAD in the days and weeks ahead. 

The U.S. Dollar dynamic is likely to be pertinent for GBP/CAD this week, which is a quiet one for the UK and Canadian economic calendars but features a raft of data from the U.S. including the May edition of the Fed’s preferred inflation measure; the Core Personal Consumption Expenditures Price Index.

But whether it’s enough to lift Sterling above the nearby technical resistance around 1.5932 on charts remains to be seen.