GBP/CAD Recovery Wanes as Loonie's Job Report Decides Outlook

GBP/CAD supported near 1.6709 & 1.6613 short-term
Attempts recovery but CA jobs data decide path ahead
Resistance obstructs between 1.68 & 1.6850 on charts

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The Pound to Canadian Dollar exchange rate has appeared to halt a fortnight run of losses in recent trade and opened the new month with a spring in its step but the outlook for GBP/CAD from here now hinges heavily upon whether there is a second successive distress signal from Canada's labour market this Friday.

Reports of rapidly declining inflation and stalling economic growth rendered the Canadian Dollar an underperformer among major currencies last week but it still managed to edge higher against the widely sold Pound even as economic data placed a question mark over the Bank of Canada (BoC) interest rate outlook.

Meanwhile, the BoC's Business Outlook Survey illustrated on Friday how pressure on consumer incomes has combined with rising costs to further dampen business prospects while also still prompting large numbers to raise prices in order to repair or sustain profit margins; adding to inflation.

"The latest inflation print is unlikely to encourage the BoC to rush and deliver an additional hike in July," writes Jordan Rochester, an FX strategist at Nomura.

"And don’t worry about the possibility of a hawkish BOC. CPI could collapse towards 0% if the PMIs are any guide," he adds in a Monday research briefing.

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of 2023 rally and selected moving averages denoting possible technical support and resistances for Sterling. Moving averages indicate support and/or resistance.

Rochester advocates that clients consider betting on a fresh rebound in USD/CAD, which fell more than 1% in June, after last week's economic data further undermined arguments for another increase in the Bank of Canada cash rate this month.

A rally in USD/CAD would be a supportive development for GBP/CAD in the absence of deeper or offsetting losses for the main Sterling pair GBP/USD, although the outlook for the Loonie from here depends almost entirely on whether there is any further sign of deterioration in the labour market during June on Friday.

"Trend momentum signals are mixed but are aligned somewhat negatively on the shorter-term oscillators which adds to the bearish outlook for the pound. Broader price patterns still suggest a (potentially bullish) consolidation within a downward-sloping channel off the early May peak," says Shaun Osbourne, chief FX strategist at Scotiabank.

"Support should be firm in the low 1.65 zone in the week or so ahead. Resistance is 1.6865 and 1.6975," he adds in a recent review of the GBP/CAD charts.

The economist consensus suggests the unemployment rate will edge higher from 5.2% to 5.3% on Friday despite a 21.4k increase in employment more than reversing the -17.3k decline seen back in May.

Above: Quantitative model estimates of ranges for this week. Source Pound Sterling Live.

May saw the first outright decline in employment since the last 'lockdown' but also followed a trickling increase in the number of people newly registered as officially unemployed dating back to January this year.

A strong jobs rebound on Friday would have ambiguous implications for BoC interest rate policy after almost all of Canada's most closely watched inflation metrics fell further than was expected for May last week with the core measure reaching 3.7%.

That leaves Canada with one of the lowest levels of core inflation among advanced economies, which could eventually become a further headwind for the Canadian Dollar if it leads financial markets to abandon bets on the cash rate being raised further up ahead.

"We continue to expect a final 25bps rate hike in September, after a pause in July. That contrasts with the market’s pricing of a terminal overnight rate of a little over 5.00%, which is still partially pricing in a July move," says Katherine Judge, an economist at CIBC Capital Markets.

"In contrast to Canada, markets are underpricing further Fed action, and we therefore look for the loonie to come under pressure in the months ahead, with USDCAD likely ending Q3 at 1.33," she adds in a forecast review last week.