GBP/CAD Week Ahead Forecast: Threatening to Break Lower

• GBP/CAD breakout possible this week
• Price action wedged between 50- and 200-day MAs
• Markets pare Bank of Canada rate bets
• Offering CAD support in the near-term

Image © Bank of Canada

Canadian Dollar exchange rates are looking increasingly constructive as markets fade bets for an imminent rate hike at the Bank of Canada amidst fears of persistently sticky Canadian wage pressures.

The Canadian Dollar put in a decent performance at the end of the previous week after the stronger-than-expected Canadian labour market report that showed the unemployment rate shrank to 5.7% in January from 5.8% previously, with 37,300 jobs being created, above expectations of 15K.

"USD/CAD briefly dipped below 1.3420 on Friday after the stronger than expected Canadian labour market report. We consider the risk has risen the Bank of Canada (BoC) will delay its rate cutting cycle to June," says Carol Kong, FX Strategist at Commonwealth Bank.

The currency market theme of 2024 has involved the pushback in expectations for central bank interest rate hikes, particularly in the U.S., UK and Canada, which has left the USD, GBP and CAD the top three performers of the year.

However, talk of another Reserve Bank of New Zealand interest rate hike following last week's strong NZ jobs data only undermines the sense that markets have been too optimistic in expecting rate cuts.

"Wages growth slowed to 5.3%/yr from 5.7%/yr in December 2023. The risk is wages growth will not have slowed enough for the Bank of Canada to be confident inflation will move sustainably to its 1%‑3% target range at its April meeting. Two more labour market reports will be released ahead of the April meeting. In our view, the risks are skewed to a more gradual easing cycle by the BoC and a stronger CAD than we currently forecast," says Kong.

There are no major data releases due from Canada this week, but next week's January Canada CPI inflation report will be important to assess whether the Bank of Canada's rate-cutting cycle will occur later than markets currently expect.

Above: GBP/CAD at daily intervals. Track GBP and EUR with your own custom rate alerts. Set Up Here

The Pound to Canadian Dollar exchange rate had risen through January to peak at 1.72, but it has since turned lower and dipped below the 50-day moving average, currently located at 1.7018.

The above chart suggests this technical region now offers resistance to any Pound Sterling fightback, and we would need to see some strong data out of the UK this week for a break higher.

If UK wage, inflation, GDP and retail sales data point to economic resilience, we would expect GBP/CAD to break above the 50-day MA and resume its uptrend.

On the downside, the 200 DMA offers support, currently at 1.6930. As the above chart shows, the exchange rate is wedged between these two momentum indicators, and whichever side the pair makes its break will inform upcoming price action.

A break lower would open the door to the December low at 1.6716.