GBP/CAD Week Ahead Forecast: Firming, But Canadian Inflation on Tap

• GBP/CAD is pointed lower
• But can rebound amidst a broader USD pullback
• Watch Canadian inflation figures Tuesday
• UK PMIs due Thursday

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A letup in U.S. Dollar strength in the coming week can offer the Pound to Canadian Dollar exchange rate (GBP/CAD) the chance to reclaim recently surrendered ground, although Tuesday's domestic inflation release must be watched closely.

GBP/CAD looks heavy on the daily chart and there is little incentive to fight the move, which is entirely consistent with the decline in GBP/USD.

This speaks of the CAD acting as a mini USD, owing to the tight financial and economic links between Canada and the U.S., which link their economic cycles
Thus, U.S. resilience affords Canada resilience and ultimately leads GBP/CAD to track GBP/USD.

To be sure, Pound Sterling has stood up to the U.S. Dollar better than most in 2024 and is broadly flat on the year against the Canadian Dollar, yet the past week saw some decent declines following underwhelming UK data that turns the near-term picture negative.

Above: GBP/CAD is trending lower as per the ADX (lower panel). A rebound is possible if the USD relinquishes some of its recent gains.  Track GBP/CAD with your own custom rate alerts. Set Up Here

But, the USD's 2024 strength is due a breather and we could see USD softening over the coming days given the lack of major economic data releases. This leaves GBP/CAD prone to a pullback in the near term.

"After jumping to a 3-month high, the US dollar index recoiled from the 105 level and failed to hold above its 100-week moving average in a sign of upside exhaustion," says George Vessey, Lead FX Strategist at Convera.

However, look for any GBP/CAD strength to be shallow at this point, as we would need to see Sterling put in a strong performance across the board and for GBP/USD to push decisively higher before GBP/CAD can retest 2024 highs.

That said, it's a relatively busy week in Canada, with the release of domestic inflation figures on Tuesday at 13:30 GMT.

The market looks for headline CPI inflation to rise 0.4% month-on-month and 3.2% year-on-year.

If the data beats expectations, expect the market to push back the start date of the Bank of Canada's interest rate-cutting cycle, which would boost CAD. We saw the USD surge last week when U.S. inflation for January came in stronger than expected, could the same be the case for Canada?

"The underlying details will be closely watched for signs on whether inflation pressures are continuing to trend — albeit gradually — towards the Bank of Canada’s 2% target," says Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada. "Substantially stronger-than-expected January labour market data and a bounce back in home resales have raised fears that the Bank of Canada will need to leave interest rates higher for longer (again) to get inflation sustainably back to target."

"Core measures remain sticky and Governor Macklem has been clear that more progress is required in underlying inflation before beginning discussions about lowering the policy rate," says a weekly FX note from Barclays. "More evidence of stickiness in Canada’s CPI release on Tuesday should therefore support CAD."

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Also worth watching is Thursday's Canadian retail sales figures, where a reading of 0.8% month-on-month is expected. That said, the market impact of this release will likely be limited.

For Pound Sterling, markets are watching survey data for February, which is due on Thursday, and look for the manufacturing PMI to have recovered slightly to 47.1, services to have edged up to 54.4, and the composite PMI to have eased up to 52.7.

The lesson of the immediate past is that the British Pound is now proving more reactive to negative data surprises, which leads us to expect that any gains that follow positive surprises in the data will be limited.

Instead, the biggest moves are likely to follow downside misses in the data, which suggests risks are pointed lower heading into Thursday.

A case in point is the significant selloff in Sterling following December's retail sales miss, which contrasts with the almost indifferent market reaction to the arguably larger upside surprise that came a month later with the release of January's figures.

Any disappointment in the data would keep GBP/CAD near its recent lows.