GBP/CAD Week Ahead Forecast: Firm

Image © Bank of Canada

The Pound to Canadian Dollar exchange rate's technical setup looks supportive of further near-term gains, but much will depend on this week's Macklem speeches and the U.S. payroll report.

Bank of Canada Governor Tiff Macklem is scheduled to speak twice this week, first on Wednesday and then again on Thursday.

This could be an opportune moment for the Governor to ready the markets for a June interest rate cut. Although Macklem would have preferred to move in tandem with the Federal Reserve, Canadian economic activity is simply not keeping pace with that of its southern neighbour.

Like other central banks, the Bank of Canada will find the benefits to the economy of cutting in June will likely outweigh the risk management considerations of cutting in tandem with the Fed.

If Macklem does indeed hint at this, the recent underperformance in the Canadian Dollar can extend.

This underperformance is reflected in a constructive Pound to Canadian Dollar exchange rate (GBP/CAD) technical setup.

Last week, we saw GBP/CAD impressively recover from the 1.6888 low, which is the 78.6% Fibonacci retracement of the 2024 rally:

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

We are watching other Fibonacci levels to offer guidance: near-term support comes in at 1.7057, which is the 50% Fib retracement, ahead of the 200-day Moving Average at 1.6981. Note the 61.8% Fib retracement is close by, so this will offer further support to GBP/CAD in the event that this is a good week for CAD.

Yet, we favour the upside this week and gains can hit 1.7127 and then 1.7213. Our Week Ahead Forecast rulebook looks to the 200 DMA as a key pivot area: when an exchange rate is below it, we consider it to be in a downtrend.

Last week saw GBP/CAD make a false break below the 200 DMA, and the subsequent recovery means we are still broadly constructive on this exchange rate.

Although Macklem forms the domestic highlight of the week, it could well be U.S. events that trigger the bigger moves in CAD.

With market expectations for the first rate cut at the Federal Reserve having receded to December following last week's hot consumer spending figures, the coming week's events will determine whether a 2024 rate cut is even on the cards or whether we will have to wait until 2025.

Wednesday's Federal Reserve policy update will be the first key test as investors will be interested to know whether the Fed is ready to validate market expectations for the first rate hike to come in December.

Recall, the Fed's most recent dot plot forecasts showed policymakers expect three rate cuts in 2023. The Fed will have to concede this is a tad ambitious in the face of the incoming data which shows the economy is starting to generate heat again.

The Canadian Dollar will weaken if the Fed cautions its previous forecasts for interest rates look too generous.

The big data event of the week will be Friday's job report: weakness here will signal that, finally, a turning point is coming. We would expect a sizeable stock market rally and a rally in the Canadian Dollar vs. the U.S. Dollar if the headline non-farm payroll figure undershoots the 210K the market expects.

But, a soft U.S. reading would bolster bets for a June rate cut at the Bank of Canada, which could mean GBP/CAD finds further support.