GBP/CAD Week Ahead Forecast: Squeezed

Image © Pound Sterling Live

The Pound and Canadian Dollars find themselves in similar positions: both currencies have been weighed down of late by the suspicion their respective central banks are going to cut interest rates in June.

Rewind to March, and the picture was very different: markets expected both the Bank of Canada and the Bank of England to cut closer to the Fed's first rate cut, which is expected in the Autumn.

So we have seen a decent repricing in rate cut expectations from approximately Autumn towards mid-year for both GBP and CAD, which has seen them underperform the majority of their peers in the past two weeks.

The net impact of these developments on the Pound to Canadian Dollar conversion (GBP/CAD) is a drop in volatility (both are subject to the same rerating in expectations), with the pair oscillating around 1.7150.

We expect this trend to persist in the near term; GBP/CAD is bound by the 50-day moving average at 1.7159 and the support of the 100 DMA at 1.7097:

Above: GBP/CAD at daily intervals with the 50- and 100- DMA annotated. Track GBP/CAD with your own custom rate alerts. Set Up Here 

The Canadian Dollar strengthened last Friday on news Canada created 90K in April, easily beating consensus forecasts for 18K, and that the unemployment rate unexpectedly stayed at 6.2%, defying expectations for an increase.

But we said at the time that CAD strength might prove shortlived as the bulk (more than half) of the job gains were driven by part-time positions.

This assessment was correct as CAD ultimately gave up most of its gains by the time the weekend came around and market-implied expectations for a June rate cut are broadly unchanged back of the jobs data.

"The headline jobs number looks like a stellar recovery at first glance, but the report is not as strong as it looks. The majority of the jobs created were part-time, a significant amount of those left over can be explained by population growth, and recent volatility in the data means you can’t overinterpret a single piece of data. That’s why it doesn’t really change the narrative for me," says Kyle Chapman, FX Markets Analyst at Ballinger Group.

There are no domestic events from Canada that will move the market this week, but UK wage figures could impact GBP/CAD.

The Bank of England last week said it will carefully consider the next two wage and inflation prints before deciding whether or not a June rate cut is appropriate. With this in mind, if Tuesday's all-important wage figures from the ONS print at weaker-than-expected levels then expect GBP weakness to resume over the coming days.

The more the market sees a June cut as being likely, the more downside we can expect in Pound-Canadian Dollar. Market-implied expectations for a June rate cut are now at 45%, meaning there is ample space for a repricing that can weigh on this exchange rate.

However, if earnings growth comes in above the 5.3% y/y figure that the market expects, look for a decent rebound in GBP/CAD above 1.7150 over the coming days.