Canadian Dollar Week Ahead Forecast: GBPCAD and USDCAD Risk Further Weakness

• GBPCAD short-term uptrend ends
• USDCAD at risk of fresh declines
• CAD's week ahead highlight is the Fed decision
• GBP awaits Bank of England, wage, GDP and PMI data

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The Pound to Canadian Dollar exchange rate (GBPCAD) is cooling off from its strong November rally, and the risk of further downside over the coming days is elevated.

However, this is a busy week for global FX, with the Canadian Dollar likely to be buffeted by the midweek meeting of the Federal Reserve.

Meanwhile, Pound Sterling faces a week jammed with data releases and a Bank of England policy meeting, which should offer some idiosyncratic GBP action.

GBPCAD failed in the run-up to the significant resistance zone of 1.73, suggesting the market had plied the area with sell orders in anticipation of such an eventuality.

This price action serves as a reminder that the FX market is not always as unpredictable as we might think.

The pullback in GBPCAD also coincides with the unwinding of overbought conditions following a solid November rally that left the Relative Strength Index (RSI) touching overbought conditions.

The below shows that the RSI's approach of 70 signalled the pair was getting overbought, and the subsequent pullback has allowed these conditions to unwind.

Above: GBPCAD at daily intervals with the RSI shown in the lower panel. Track CAD with your own custom rate alerts. Set Up Here.

Elsewhere, note how GBPCAD has broken through its upward-sloping trend line, which leaves us wary of further downside in the near term.

Last week, the Canadian Dollar was an outperformer after the Bank of Canada opted to keep interest rates unchanged and said nothing that encouraged markets to raise bets for rate cuts in 2024.

The Dollar-Canadian Dollar exchange rate was relatively flat after the U.S. Dollar staged a strong rebound (USD was 2nd best performer after the JPY), but USDCAD's bounce may be running out of gas already.

Chart courtesy of Forex.com.

"As the chart above shows, USD/CAD found support at the convergence of its 200-day EMA and the 50% Fibonacci retracement in the 1.3500 area to start last week. However, the pair now appears to be rolling over in line with its downtrend off the November 1 high near 1.3900," says Matthew Weller, an analyst at Forex.com.

To the downside, bears will first look to target last week’s low near 1.3500, followed by the 61.8% Fibonacci retracement at 1.3400 if it breaks, according to Weller.

But should Tuesday's U.S. CPI report prove hotter than markets expect - or the Fed's meeting midweek prove hawkish - the Dollar would be boosted.

Weller says this could erase the near-term bearish bias and lead to a break above last week’s high near 1.3620.

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This is an action-packed week regarding UK data, and the rule of thumb is that the Pound will likely rise if the actual figure comes in higher than the expected reading.

But we suspect the currency will experience a greater downside reaction to disappointments. This is simply because the Pound has risen strongly over the past two weeks, and the market has adjusted to a run of recent upside surprises in the data.

Tuesday sees the release of wage data, with average earnings (total pay) expected by the market to come in at 7.5% for October, down from 7.9% previously.

Average earnings (regular pay) are expected at 7.4%, down from 7.7% in September.

Wednesday sees the release of UK GDP figures for October, where the consensus sees a figure of 0.2% month-on-month in October, up from -0.1% in September.

The rolling three month rate is expected at 0.3%, up from 0.1%.

Thursday sees the Bank of England interest rate decision and guidance update, please see below for more details on what to expect.

The week is rounded off with the S&P Global PMI release for December, which falls a week earlier than usual due to the impending Christmas holiday.

Manufacturing is expected to read at 47.5, services at 51.2 and the composite at 51.

No rate change is expected from the Bank of England on Thursday, but the currency market reaction will rest on the tone of the guidance, particularly regarding the issue of potential rate cuts.

The Bank has been a source of support for Pound Sterling of late, as most policymakers have made it clear they are uncomfortable with the market raising expectations for interest rate cuts in 2024.

Heightened expectations for cuts act on real-time bond yields and thus lending rates, thereby easing financial conditions and risking the Bank's efforts in bringing inflation down.

"Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time," says James Smith, Developed Markets Economist at ING Bank

ING says to expect some "hawkish forward guidance", including the line on keeping rates restrictive for a prolonged period of time.

Any hawkish read can be expected to support the Pound.