GBP/CAD Week Ahead Forecast: Looking to Retest Multi-year Highs

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The Pound to Canadian Dollar exchange rate (GBP/CAD) hit its highest level in years just last week, but there has been no follow-through, meaning this could be a pivotal week for the pair.

GBP/CAD printed its highest level since 2022 last week at 1.7352, but ultimately the advance failed here, confirming the notable resistance in this area.

The resistance comes in the form of a horizontal line at 1.7330 in the below chart. As indicated, the market has struggled to get back above here since it fell below the line in 2021:

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

Of interest is how far the retreat from last week's peak extends in the near term: if it is shallow, we would anticipate another attempt at the 2024 high will be made in the coming days.

The coming week will be interesting for GBP/CAD, owing to a busy UK and Canadian calendar that sees both countries release inflation numbers.

Canadian inflation is due for release on Tuesday and is predicted to have come in at 3.1% year-on-year in February. This would be up from 2.9% in January and signal the disinflationary trend has stalled somewhat.

We reported last week that a major Canadian bank believes all signs point to the need for the Bank of Canada to cut interest rates as, on a year-over-year basis, inflation has already returned to the Bank of Canada's 1-3% target range.

Last month's 2.9% outcome was well below the consensus expectation for 3.3%.

"This downside surprise to inflation, relative to expectations, was the most pronounced since September 2018," says Stefan Marion, an analyst at National Bank of Canada.

Another undershoot would confirm inflation momentum is weakening and opens the door to Bank of Canada rate cuts. A soft print could see GBP/CAD make a meaningful move higher.

But, the Pound faces its own risks: the biggest data event on the Pound's calendar is the release of headline CPI inflation, where a rate of 3.6% is expected for February, down from 4.0% in January. The month-on-month increase is expected to read at 0.6%, up from -0.6%.

The Pound will come under pressure if the print undershoots expectations and prompts markets to raise expectations for a June rate cut at the Bank of England.

"We are forecasting a sustainable return to 2% inflation this year," says Brian Martin, Head of G3 Economics at ANZ. "We forecast wage growth will fall towards 4% y/y by mid-year, allowing the BoE to be confident that underlying inflation is falling sustainably."

The Bank of England will keep Bank Rate unchanged at 5.25% when it meets at 12:00 on Thursday, but any changes to the accompanying statement and vote composition will potentially move markets.

Should another member of the Monetary Policy Committee (MPC) join Swati Dhingra and vote for a cut, the Pound could come under pressure. Any shift in guidance that hints at the prospect of future rate cuts could also weaken the Pound.

"The GBP could be vulnerable to any evidence that more MPC members are coalescing around the view for stable rates and/or rate cuts," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

"We think August is the earliest that the MPC will have enough evidence of progress on inflation to start cutting rates. The May labour market report and June inflation data will feed into its updated macroeconomic forecasts as part of the Monetary Policy Report," says ANZ's Martin.

Thursday sees the release of PMI data for March, which will give a strong snapshot of this month's activity. The headline services PMI is expected to read at 54.2 which would indicate a strong expansion and confirm the recession is truly over.

Markets are positioned 'long' on the Pound, which hints that it will require a sizeable beat to prompt any meaningful gains. By the same token, the bigger reaction would likely be to the downside on any undershoot in the data.

Retail sales are due on Friday. January's release of December retail sales showed an unexpectedly large slump, which prompted a decent sell-off in the Pound.

Meanwhile, February's release showed a 3.4% y/y increase in January, indicating that the economy likely exited recession at the start of the new year.

In short, the retail sales print matters, and another strong reading could shore up the Pound and confirm that a strong recovery is underway.