GBP/CAD Week Ahead Forecast: The Two Levels to Watch

Above: BoC Governor Macklem is due to speak Tuesday. File image © Bank of Canada, Reproduced Under CC Licensing.

The Pound to Canadian Dollar exchange rate (GBP/CAD) is forecast to see gains fade near 1.1710 and losses staunched close to 1.7130 in the coming week, which will be dominated by UK and Canadian inflation releases.

These are the boundaries of a near-term range that we anticipate holding in the near term, particularly given the stability seen in FX markets following a tense weekend of geopolitical tensions centred on the Middle East.

Despite an unprecedented attack on Israel by Iran, global oil prices are contained and FX markets are barely moved from Friday's close. Had the U.S. Dollar rallied in the wake of these events, we would have expected the Canadian Dollar to stick close to its North American cousin and advance against other G10 currencies like the Pound and Euro.

But a becalmed market keeps the North American duo steady at the start of the new week and allows us to trace a potential route forward for GBP/CAD.

GBP/CAD is liable to maintain ground between the 23.6% (1.7210) and 38.2% (1.7130) Fibonacci retracement levels of the 2024 rally:

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

Regarding an potential break of our preferred range-trade, we would favour the move to be towards the downside as there are risks the Canadian Dollar can move higher on any extension of the recent 'pricing out' of U.S. interest rate cuts.

Geopolitical tensions and associated moves higher in oil can also aid CAD.

A stronger-than-expected Canadian inflation print on Tuesday could also potentially pressurise GBP/CAD lower. Canadian CPI inflation is expected to print at 0.7% month-on-month in March, up from 0.3% in February, which suggests price dynamics are heading in the wrong direction for the Bank of Canada.

Following the inflation print, markets will hear from Bank of Canada Governor Tiff Macklem, who is scheduled to speak and might add further colour to the interest rate outlook.

Markets currently anticipate a June rate hike from the BoC, but doubts have arisen following last week's U.S. inflation print that prompted markets to push back to September an expected first rate cut from the Fed.

Most central banks would prefer to move in tandem with the Fed in order to minimise currency weakness, which can act to boost imported inflation levels and potentially generate domestic financial instability.

Will Macklem give a nod to the Fed and hint the Canadian rate cutting cycle will be delayed? If so, the Canadian Dollar can rally.

But, the Canadian economy has slowed markedly in 2024, moreso than that of the U.S., and any delay risks triggering a deeper economic contraction that leaves scars on the economy. If Macklem hints the BoC is willing to ignore the Fed and validates a June hike, the CAD can come under pressure.

UK inflation is released on Wednesday and it goes without saying that any undershoot vs. expectations (consensus = 2.9% y/y) will weigh on the Pound.

Risks are two-way and an above-consensus reading would offer the Pound a boost as it would shift the balance of odds for the first rate cut from June to August, potentially putting the Bank of England behind the Bank of Canada concerning the start of the rate cutting cycle.

Image courtesy of UniCredit.

Look for GBP volatility on Tuesday morning when the all-important UK wage figures for February are released. The Bank of England has been reticent to cut interest rates for fear wages are running too high and propping up domestic inflation rates.

Should the figures undershoot expectations, then the market will grow more comfortable with the idea of a June rate cut, which can result in GBP/CAD weakness.

Tuesday also sees a speech by Bank of England Governor Andrew Bailey, which will offer him the chance to address the issue of potential rate cuts at the Bank in the coming months.

There is no Bank of England decision due in April, making this a potentially important speech as it will serve as the link to the May meeting.

Any hint of increasing confidence that rates can be cut without stoking inflation will likely result in a softer Pound. Wednesday brings with it another Bailey appearance and that of fellow MPC member Haskel.