GBP/CAD Week Ahead Forecast: Momentum Ebbs from Recovery

• GBP/CAD recovery could soon lose momentum 
• If Canadian data casts economy in resilient light
• Local GDP & job data to influence BoC outlook
• U.S. data key for all North American currencies

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The Pound to Canadian Dollar rate entered the new week on the front foot and with a hat-trick of gains under the belt but its rally could lose steam in the days ahead with Sterling struggling to advance much beyond the nearby 1.63 level in the absence of a further setback for the Canadian Dollar. 

Canada's Dollar was an underperformer early in the new week when it and other commodity-linked currencies lost ground to the U.S. Dollar amid a heightened financial market focus on economic disruption caused by continuing coronavirus-containment efforts in China.

"Uncertainty about the path out of China's COVID zero policies, and the potential for political tension in China, have weighed on commodity prices and local equity markets. In turn, those moves have created ripple effects," writes Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

"This is indirectly benefiting energy-importing currencies like the EUR," he adds.

Monday losses matched those of the Norwegian Krone while lifting USD/CAD above 1.34 and enabling GBP/CAD to rise back above 1.62 for the first time since April but much now depends on the outcome and implications of North American economic data due out in the days ahead.

Above: GBP/CAD shown at hourly intervals alongside USD/CAD and Dollar-Renminbi rate. Click image for closer inspection. 

Tuesday's September GDP report and Friday's November employment data are the highlights of the Canadian calendar and will be instrumental in determining if the Loonie's November underperformance stretches into December.

Here the market is likely to look for any signs that Bank of Canada (BoC) interest rate policy is beginning to take its toll on businesses and households. 

"Canada looks on track to deliver a Q3 GDP reading (Tuesday) that is just above RBC Economics' 1% annualised forecast for Q3," writes  Alvin Tan, Asia head of FX strategy at RBC Capital Markets, in a Monday market commentary. 

"We see some upside risk to StatCan's preliminary report of a 0.1% increase in September GDP, with the surprise mostly driven by higher than expected growth in non-conventional oil and gas extraction," he adds. 

Economists expect the GDP and jobs data to cast Canada's economy in a resilient light but any surprise weakness could lead the market to second guess its longheld view that the BoC's cash rate is set to rise to somewhere between 4.25% and 4.5% early next year.

Above: GBP/CAD at hourly intervals with Fibonacci retracements of November rebound indicating possible areas of technical support for Sterling. Selected moving-averages denote possible technical supports. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Anything that leads the market to doubt its assumptions about the BoC rate outlook would support GBP/CAD and may even enable it to climb further. 

This week's U.S. data will be no less important than the figures out in Canada, however, and especially if positive surprises revive the market's appetite for North American currencies that have underperformed most of their European counterparts over the last month. 

"Given the trade links, a steeper deceleration in US GDP growth on its own acts as a brake on Canadian activity. Each 1% decline in US GDP feeds into a 0.3% decline in Canada," writes Avery Shenfeld, chief economist at CIBC Capital Markets, in a Friday research briefing.

Wednesday's U.S. GDP data for the third quarter and speech from Federal Reserve (Fed) Chairman Jerome Powell are the highlights of the U.S. week but will be followed on Thursday and Friday by the latest reading of the Fed's favourite measure of inflation and November's jobs report.

Economists are looking for the U.S. economy to have grown by 2.8% last quarter, up from 2.6% previously, and for it to have added 200k jobs last month.

Above: GBP/CAD at daily intervals with Fibonacci retracements of February 2022, January 2021 and March 2018 downtrends indicating possible areas of technical resistance for Sterling. 200-day moving-average denotes possible technical support. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

"Given evolving recession concerns, the continuing pick up in CAD/commodities correlation may be a factor to monitor," warns Shaun Osborne, chief FX strategist at Scotiabank, writing in a Friday market commentary. 

"Our week ahead model anticipates modest downward pressure on the USD around a 1.3210/1.3530 range as a guide. That suggests USD sellers can continue to fade USD gains above 1.34 (mid/upper 1.34s ideally) while USD buyers can target the high 1.32/low 1.33 range," Osborne adds. 

GBP/CAD might struggle during the latter half of the week if Fed Chairman Powell succeeds in reviving an uptrend in bond yields and rally in U.S. exchange rates that stalled early on in November after official data suggested that U.S. inflation moderated in October. 

This is in part because GBP/CAD has demonstrated a negative correlation with the U.S. Dollar index and USD/CAD throughout much of the year.

"He is scheduled to discuss the economic outlook and labour market. We are expecting Chair Powell to deliver a hawkish policy message similar to following the last FOMC meeting when he downplayed the importance of slowing the pace of rate hikes and warned that rates are likely to have to rise to a higher peak than previously planned," warns Lee Hardman, an analyst at MUFG.

Above: GBP/CAD shown at weekly intervals with Fibonacci retracements of February 2022, January 2021 and March 2018 downtrends indicating possible areas of technical resistance for Sterling. Click image for closer inspection.