GBP/CAD Week Ahead Forecast: Selloff Ending, But Data Will Have Final Say

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The corrective selloff in the Pound to Canadian Dollar exchange rate might be coming to an end, but Canadian and U.S. job figures out at the end of the week will have the final say.

GBP/CAD has corrected the overbought conditions that built up through May, falling from a peak of 1.76 to 1.7338 through the latter half of June.

The decline means the exchange rate is better balanced, and the consolidation of last week suggests the recalibration process might be ending. However, we note the exchange rate still has some way to go before it encounters its 100-day moving average (DMA) at 1.7231, so we won't discount the prospect of further downside movement altogether.

The week starts with a bout of GBP/CAD upside associated with the rise in European assets, which are finding some relief in the evidence that neither the far left nor the far right will garner a majority in the French legislative elections.

The far-right party of Marine Le Pen didn't do quite as well as the final poll of polls were expecting (34% vs. 36.2%). All signs point to no single party holding a majority in the legislature once the second round of votes is completed this coming Sunday, removing some significant tail-risk outcomes that would have been detrimental to Europe.

The relief rally seen in markets is centred on Europe, which is helping the Pound against the dollar family. We forecast gains to extend to the 1.74 level that provided interim support during May, noting that this could now be a level of resistance.

Support this week will be 1.7274, which we think can be tested if Canadian and U.S. labour market data beat expectations.

Above: GBP/CAD at daily intervals. The RSI in the lower panel has unwound notably overbought conditions and is pointing up again. Track GBP/CAD with your own alerts, find out more here.

The market looks for Canada to have created 25K jobs in June, which is down from 26.7K in May. An undershoot will boost expectations that the Bank of Canada will cut interest rates again in July, weighing on CAD.

The U.S. job report is also important, as we have seen in recent times that a strong reading can boost the fortunes of Canada, which is closely aligned with the U.S. economy.

The week's data highlight will be Friday's non-farm jobs report. A headline figure of 180K is expected, down from 272K. Average hourly earnings are expected to print at 0.3% month-on-month in June.

As a reminder, the Canadian Dollar can rise if the market raises expectations for a September Fed rate cut following these data and appearances. Any disappointments will soften CAD. The market is currently pricing in a 56% chance of a September rate cut at the Fed.

The UK election on Thursday is a low-risk event for the Pound at this stage. The odds of a Labour victory are high, and we have not seen any shift in the polling to suggest this will not be the outcome.

The first key event to watch is the exit poll due at 10 PM on Thursday night. This has been a very accurate indicator in recent history.

The surprise would be a stronger showing by the Conservatives, which would result in a 'hung parliament,' in which no single party can command a majority on its own.

This would result in a softer Pound as markets contemplate a period of uncertainty. However, we would expect volatility to be shortlived as there is nothing radical in the spending and tax plans of Labour, the Conservatives or Liberal Democrats.