GBP/CAD Week Ahead Forecast: Supported Above 1.54

• GBP/CAD supported around 1.54 but upside limited
• Unless U.S. growth data upsets North American FX
• U.S. data, USD in focus ahead of Canada GDP data

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The Pound to Canadian Dollar exchange rate has shown signs of stabilising above the nearby 1.54 level but could continue to have difficulty sustaining rallies when near to the 1.56 handle if the Loonie and North American counterparts remain outperformers of other major currencies in the days ahead.

Sterling entered the new week on the front foot with an extension of Friday's rally back from new 10-year lows established near to 1.5354 last week although Canadian Dollar strength and resilience has been quick to bring an end to each of GBP/CAD’s earlier attempts at regaining the 1.55 handle. 

GBP/CAD traded back above that latter level on Monday but with little in the UK or Canadian event calendars to provide fuel for the recovery in advance of this Friday’s Canadian GDP report, the risk is of the rally losing momentum ahead of the 1.56 level in the opening half of the week. 

“Canadian GDP likely declined in May – in line with the 0.2% drop in Statistics Canada’s preliminary estimate a month ago. We do not expect another drop in June,” says Nathan Janzen, assistant chief economist at RBC Capital Markets.

“But the pace of growth is clearly slowing as the economy bumps up against long-run production capacity limits, and housing markets have already shifted substantially into reverse,” Janzen and colleagues said on Friday. 

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

Consensus among economists suggests Friday’s GDP report will confirm a -0.2% contraction of the Canadian economy for the month of May, in line with the advanced estimate and early warning from Statistics Canada last month. 

That sets a high bar for Sterling to benefit from the Canadian data, although there is a risk - or chance - that a busy roster of U.S. economic events and data may prove helpful for GBP/CAD from the mid-week milestone onwards. 

But this would require further indications that a slowdown is taking hold faster than financial markets and the Federal Reserve have so far given credit for, and that is far from assured as a prospect for the week ahead.

“In Canada, May GDP likely came in at -0.2% m/m due to supply chain issues and weakness in the real estate market,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. 

“In the US – I’m eyeing durable goods on Wednesday (orders have firmer than I expected of late) and initial claims on Thursday. The latter has been rising in recent weeks and it appears that a base has formed,” Rai added on Monday. 

Above: Pound to Canadian Dollar rate shown at 4-hour intervals with Fibonacci retracements of June decline indicating prospective areas of technical resistance for Sterling. Click image for closer inspection.

Of all of the data due out, Thursday’s U.S. GDP figures for the second quarter are likely the most important for GBP/CAD, which would potentially benefit if the data suggests that recent market speculation about the perceived risk of a U.S. recession is even close to being well founded. 

“Through July, participants have been able to downplay evidence of slowing activity in favor of the more reassuring signals from the labor market. But signs of sharp slowing in activity will become harder to ignore,” says Jonathan Millar, deputy chief U.S. economist at Barclays.

“Indeed, GDP may well show two consecutive quarterly declines (ie, a technical recession) when the advance estimates for Q2 are released the day after the FOMC meeting,” Millar and colleagues said on Monday.

That’s less of a far-fetched scenario than it would have appeared just a few days ago following the release on Friday of S&P Global’s latest PMI surveys, which suggested that activity in the U.S. services sector fell faster and harder in July than it did among Europe’s wounded manufacturers.

There is a risk, if not a likelihood, that other North American currencies could be undermined alongside the U.S. Dollar in any such scenario because of what it could imply about the outlook for other North American economies. 

This was exactly what happened in the wake of the S&P surveys on Friday. 

Above: Pound to Canadian Dollar rate shown at daily intervals.