GBP/CAD Rate Week Ahead Forecast: Approach of 1.57 Possible 

• GBP/CAD may have scope to climb nearer to 1.57
• Technical supports underpin around 1.5541, 1.5502
• U.S. data in focus ahead of BoE & CA’s job figures 

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate reached one month highs last week but may get an opportunity to advance closer toward the 1.57 handle in the days ahead if the U.S. Dollar remains soft or the Bank of England (BoE) surprises on the upside of market expectations this Thursday.

Canada’s Dollar rose briefly against Sterling and some other currencies last Friday after GDP data cast the local economy in a more resilient light than financial markets and the Bank of Canada (BoC) had envisaged for the month of May, with possible implications for interest rates up ahead.

But the Canadian Dollar rebound faded quickly alongside that of the U.S. Dollar, enabling GBP/CAD to recover its footing ahead of the weekend and leaving it well positioned for further possible gains at the open of the new week.

“With the economy in excess demand and long-term inflation expectations drifting higher, the Bank needs to bring rates into restrictive territory quickly. We look for the Bank to deliver another 75bp hike in September and 25bps in October before reaching a terminal rate of 3.50%, with rate cuts in 2023Q3,” says Andrew Kelvin, chief Canada strategist at TD Securities. 

“We view the BOC's surprise 100bp as an accelerant to the inevitable reckoning awaiting the consumer in the fall. USD longs are not as well subscribed against the CAD so we see room to add. CAD is one of the most correlated currencies to risk in the FX complex. We are patiently long USDCAD,” Kelvin and colleagues said in a review of TD’s forecasts on Friday. 

Above: Pound to Canadian Dollar rate shown at hourly intervals with Fibonacci retracements of late July rebound indicating of possible areas of short-term technical support for Sterling. Click image for closer inspection.  

Friday’s price action continued an emerging trend that has seen the Canadian Dollar begin to lag behind around half of its counterparts within the G10 sphere of currencies, alongside a U.S. Dollar that has corrected lower almost across the board since the middle stage of July.

The Canadian Dollar's recent slippage down through the performance rankings came despite the strongest one week gains from international stock markets for more than two years and increases for many commodity prices and other risk assets, which are normally supportive of the Loonie. 

“The market’s lack of enthusiasm for the CAD is hard to fathom, from our point of view, but our fundamental fair value model does suggest the CAD remains overvalued,” says Shaun Osborne, chief FX strategist at Scotiabank, in a Friday look at the week ahead.

Rising stock markets and buoyant commodities were byproducts of declines in the U.S. Dollar last week and it’s possible - if not somewhat likely - that the Loonie was also hampered by the market’s second guessing of the outlook for the greenback.

Dollars were sold almost across the board again last week, enabling Sterling and the Loonie to partially reverse the heavy incremental losses sustained since early June after the Federal Reserve (Fed) confirmed that the pace of its interest rate rises could slow up ahead.

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

To the extent that the U.S. Dollar remains soft and a weight around the ankles of the Canadian Dollar this week, it would be supportive of GBP/CAD, although much about price action in all three currencies is likely to be determined by a busy roster of economic data and event risks in the U.S., UK and Canada. 

“Real GDP fell 0.9% in Q2, contracting for the second straight quarter and fueling recession headlines. Private domestic demand has slowed considerably,” says Jonathan Pringle, chief U.S. economist at UBS, in reference to figures out last week showing the U.S. slipping into a so-called technical recession.

“For the main event next week, we expect a material slowdown in the pace of nonfarm payroll employment gains, slowing from the nearly 400k average pace to well under 200k in July as incoming data continues to soften,” Pringle and colleagues said in a Friday research briefing.

For Sterling itself much will be determined on Thursday and by whether the Bank of England lifts its Bank Rate by a typical quarter percentage point to 1.5%, or if it will opt for one of the larger increases that have recently been popular in Canada and elsewhere, which would take Bank Rate to 1.75%.

Market pricing errs in favour of the latter but only marginally so, meaning that GBP/CAD could have scope to rise if the Monetary Policy Committee surprises positively. There is high uncertainty over whether it will, however.

Above: USD/CAD shown at daily intervals with 200-day moving-average and Fibonacci retracements of October 2021 and June 2022 uptrends indicating possible areas of technical support for U.S. Dollar. Click image for closer inspection.  

Thursday’s BoE decision is the highlight for Sterling and GBP/CAD ahead of Friday’s release of Canadian employment data for July, which could impact market assumptions about the Bank of Canada interest rate outlook and so also USD/CAD and GBP/CAD.

“Scotia expects +35k. The BoC has emphasized the very, very tight labour market in recent comments and that broad characterization is unlikely to change for now. Decent jobs gains will be CAD-supportive,” Osborne said on Friday. 

“Canadian data surprises have deteriorated a little and there is clear concern among investors that the BoC’s hawkish approach to monetary policy risks destabilizing the domestic housing market and will not be sustained if the Fed slows the pace of tightening in September. We disagree; inflation appears stickier in Canada and we feel that BoC policy makers are motivated to push on with more aggressive rate moves,” he added.

A strong job report from Canada on Friday would potentially be enough to curb any further recovery by the Pound to Canadian Dollar rate ahead of the weekend as it could be perceived by the BoC as further evidence of "excess demand" that would greenlight further increases in the cash rate.

However, any surprise weakness might be likely to stimulate the Pound to Canadian Dollar rebound further.

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