Pound to Canadian Dollar Week Ahead Forecast: Fresh Two-year High

• GBP/CAD just scored a new two-year high
• But strong technical resistance resides here
• Odds of a short-term pullback grow

Image © Bank of Canada

The Pound to Canadian Dollar exchange rate (GBP/CAD) kissed a new two-year high at the start of the new week but is now pulling back.

The retreat confirms this area offers strong technical resistance which has undone numerous multi-month rallies in the past, resulting in a longer-term sideways trend below the 1.7330 area.

We also note the Relative Strength Index (RSI) - a popular technical momentum indicator - is flirting with overbought conditions and is starting to pullback:

Above: GBP/CAD is hitting a major resistance point. Lower panel shows RSI potentially pulling back from overbought, which can lead to consolidation in the exchange rate. Track GBP and CAD with your own custom rate alerts. Set Up Here

These developments make us inclined to expect a pullback over the coming days.

It is worth noting we have also seen a similar pattern in other Pound vs. commodity currency pairs, most strikingly in the GBP/NZD. This reminds us that what impacts the broader commodity dollar complex will also have an impact on GBP/CAD.

For now, any weakness in GBP/CAD and other GBP-commodity currency exchange rates, is expected to be shallow. For GBP/CAD in particular, we note trade is above the 50-, 100- and 200-day moving averages (DMAs).

Our preference in our Week Ahead Forecast studies is to expect upside on a multi-week timeframe while above these indicators. Our general rule of thumb is that a break below the 50 and 100 DMA serves as a signal to be on alert for a turn in trend.

Only a break below the 200 DMA (currently at 1.6960) will signal the trend has turned from upside to downside. So it will take some time before GBP/CAD risks flipping from upside to downside.

But it is a big week ahead in terms of data, not Canadian data, mind you, but U.S. data.

The U.S. matters greatly for CAD, hence why the currency is often referred to as the 'mini U.S. Dollar'. Should Tuesday's U.S. inflation report print below expectations, we would anticipate CAD weakness and GBP/CAD to break to fresh multi-year highs.

Headline CPI inflation is expected at 0.4% month-on-month and 3.1% year-on-year, with the core CPI figure seen at 0.3% m/m and 3.7% y/y.

Any stronger-than-expected prints can underscore our preferred expectation for a CAD rebound and GBP/CAD consolidation.

Above: The descent of U.S. inflation has slowed lately. Image: UniCredit.

To underscore the impact potential of U.S. developments, consider that last Friday saw the Canadian Dollar score the accolade of the day's joint second-biggest G10 loser despite Statistics Canada revealing employment rose by 41K in February, exceeding the 20K the market expected and January's 37.3K.

The unemployment rate ticked up to 5.8% from 5.7%, but this was in line with expectations. So, the strong domestic print was completely overshadowed by the weaker U.S. wage data, which anchored North American bond yields and the USD and CAD.

The British Pound is 2024's best-performing G10 currency, and idiosyncratic factors can explain recent GBP/CAD gains.

The Pound will be tested on Tuesday when UK wage data is released; any undershoot would prompt a potentially notable pullback in Pound exchange rates.

The market looks for a 5.7% increase for January (when bonuses are included) and a 6.2% increase when bonuses are excluded.

Keep an eye on Wednesday's release of monthly GDP figures. For January, a figure of 0.2% month-on-month is expected.

Any above-consensus print in either the GDP or wage figures could help the Pound on its journey higher.