Pound-Canadian Dollar Week Ahead Forecast: Limited by Loonie's Recovery 

• GBP/CAD supported above 55-day average 1.6129 
• But scope for gains limited by outperforming Loonie
• USD, U.S. CPI & other global factors in driving seat 

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The Pound to Canadian Dollar exchange rate has held above its 55-moving-average at 1.6129 in recent trade but is likely to be kept under wraps below its January highs around 1.64 this week as the Loonie's nascent outperformance of major currency counterparts limits GBP/CAD's room for maneuver.

Sterling was treading water against the Loonie on Monday as both currencies benefited from further declines in U.S. Dollar exchange rates after economic numbers out on Friday prompted the markets to revise down expectations for Federal Reserve (Fed) interest rates this year. 

This was after U.S. wage growth surprised notably on the downside of expectations for December and the latest Institute for Supply Management (ISM) Services PMI warned that the largest U.S. economic sector was likely in recession by year-end.

The Canadian employment market, on the other hand, added a near-record number of new jobs last month while pay packets grew by more than five percent for a seventh time running in an outcome that could yet have implications for Bank of Canada (BoC) interest rate policy.  

"BoC policy makers will have to consider rising core inflation, elevated wages and still tight labour markets at the end of the month, making a 1/4-point hike (at least) a strong likelihood," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Friday research briefing.

Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving averages and Fibonacci retracements of November rally indicating possible areas of technical support for Sterling. Click image for closer inspection. 

"Our correlation matrix suggests that yield differentials are not that influential for spot at the moment but equities should respond positively to softening Fed hike expectations and that will help lift the CAD—to somewhere a bit closer to where we estimate fair value (1.3437) to be," Osborne says of USD/CAD.

With unemployment remaining near historic lows and pay growth picking up the risk is that BoC policymakers feel compelled to lift interest rates further in January after indicating back in December that any further increase is no longer a foregone conclusion. 

Friday's job data has helped the Canadian Dollar extend its January recovery against the U.S. Dollar while keeping GBP/CAD contained below 1.64 and the author's model suggests that Sterling is likely to remain capped below that latter level this week.

"The post-payrolls relief rally in markets may continue into this week. This is especially as there are no major data catalysts until December CPI, released Thursday. And the print itself we think has downside risks," says Calvin Tse, head of U.S. macro research at BNP Paribas.

"We also think the markets are prematurely pricing the Fed “pivot”. Indeed, while we expect material moderation in both headline and core CPI, we still see little relief in the key “core services ex shelter” component that the Fed has been at pains to put the spotlight on," Tse writes in a Monday research briefing.

Above: USD/CAD shown at daily intervals with selected moving averages. Click image for closer inspection. 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.

U.S. Dollar exchange rates and speculation about the outlook for China's economy are likely to remain prominent influences on currencies this week.

"The G10 currency to have risen the least in the last three months against the dollar -the CAD – has most room to rally, after Friday’s Canadian jobs data," says Kit Juckes, chief FX strategist at Societe Generale, on Monday. 

Canada's Dollar had largely sat out of the correction lower in U.S. Dollar exchange rates to the benefit of Sterling since early November but with USD/CAD falling sharply last week the Loonie may be about to weigh heavier around the ankles of GBP/CAD over the coming days.

The week ahead is a quiet one for Canadian economic data but includes speeches from Bank of England (BoE) policymakers and the release of UK GDP data for November on Friday that could impact market appetite for Sterling this week.

The main event  is likely to be Thursday's U.S. inflation figures for December, however, with financial markets looking to see a third consecutive fall somewhat vindicating the market's recent downgrades to assumptions about the interest rate outlook.