Pound to Canadian Dollar Rate Week Ahead Forecast: Rebound Can Extend, Labour Market Data in View

• GBPCAD continues to unwind from oversold conditions
• Scope for further technical gains this week
• Canadian labour market stats to dominate focus

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GBPCAD is looking to extend a short-term rebound in a week that will be dominated by the release of Canada's monthly labour market statistics.

We wrote in last week's 5-day forecast that "GBPCAD has entered a downtrend that can be expected to advance over the coming weeks, but the next five days could see some consolidation as the daily chart is screaming of oversold conditions."

This proved correct with the pair correcting from oversold conditions and rising back to 1.6562 at the time of writing Monday. The question now is how far this rebound can extend before that broader downtrend resumes.

Shaun Osborne, an FX strategist at Scotiabank, reckons short-term GBP rebounds may be limited to the mid/upper 1.65s, which is his "tentative estimate at this point while major resistance sits at 1.6850/60."

"A clear push back through the upper 1.68s is needed to steady the pound at this point more broadly," he says.

Whether GBP/CAD can attain levels near 1.68 could depend on what happens to the Pound-Dollar exchange rate as the Canadian Dollar is tracking the U.S. dollar, ensuring the GBP/CAD's retracement matches that of GBP/USD.

Above: GBPCAD at daily intervals with the Relative Strength Index (RSI) in the lower panel. The RSI has now corrected from oversold, as we expected in last week's forecast.

As noted here, some analysts reckon the GBP/USD rebound can extend further purely on technical terms, which suggests further support for GBP/CAD over the coming days.

The data calendar in the UK is empty this week, placing much of the idiosyncratic focus on Canada's labour market statistics due out Friday.

The market is looking for an increase in headline employment to 17K, which marks a deceleration on the previous month's 39.9K.

The data will impact the market's expectations regarding the prospect of further rate hikes at the Bank of Canada, with any upside surprises underpinning such expectations and thus supporting CAD.

Any undershoot, though, would have the opposite effect and potentially allow the GBP/CAD to register a second consecutive weekly gain in sympathy with the required technical consolidation.

Ahead of the release, economists at Royal Bank of Canada (RBC) say surging Canadian population growth is helping to fill open positions, and will continue to boost the count of employed workers.

RBC looks for a consensus-beating 25k increase in employment in September to be reported, which would offer CAD some upside if correct. However, the extent of any gains could prove limited.

"The broader macroeconomic backdrop is continuing to soften," warns Nathan Janzen, Assistant Chief Economist at RBC. "Controlling for population growth, GDP has contracted for four straight quarters on a per-person basis – including a 3.5% (annualized) per-capita decline in Q2."

Above: "Labour demand in Canada is slowing from elevated levels" - RBC.

Canada's labour market has meanwhile been absorbing new worker supply at a slower pace as demand slows and the number of job vacancies in Canada has been declining for more than a year after peaking in May 2022.

The unemployment rate has begun to rise, climbing to 5.5% over July and August from 5.0% in the spring.

"We look for another tick up to 5.6% in September with growth in the labour force growth again outpacing that of employment," says Janzen.

"Evidence is building that earlier rapid and aggressive interest rate hikes from the Bank of Canada are finally having their intended impact on the broader economy, with consumers pulling back on spending while labour demand softens," he adds.

The Canadian Dollar could therefore find a lift if the headline employment reading beats expectations, but in all likelihood, the data will confirm an economy that is slowing and easing labour market tightness.

This suggests any domestically induced boosts to CAD might be shortlived and the currency will have to rely on another broad USD rebound for a boost.