GBP/CAD establishing tentative foothold at 1.65Upside limited & consolidation likely short-termCanadian CPI & GDP could support GBP/CADIf inflation retreats or economy softens further

The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions.

The Pound to Canadian Dollar exchange rate entered the new week near to nine-month highs but could be likely to consolidate recent gains around 1.65 in the days ahead unless the Loonie finds reason for further underperformance in Canada's latest inflation and economic growth data.

Canada's Dollar remained an underperformer among major currencies last week but it still managed to edge higher against a poorly Pound Sterling, which reached nine-month highs above 1.68 against the Loonie during midweek trade before falling heavily ahead of the weekend.

Losses came after two members of the Bank of England (BoE) Monetary Policy Committee voted to leave interest rates unchanged in December, upsetting a hawkish market that had looked to see all members of the nine seat panel voting in favour of a ninth increase in borrowing costs for this cycle.

Dovish dissent on the MPC overshadowed for Sterling an increase in Bank Rate to 3.5% and decision that made for the strongest tightening cycle at the BoE since the period between May 1988 and October 1989 when the Minimum Band 1 Dealing Rate doubled from 7.37% to 14.87%.

"Although markets have a fair bit of Canadian and US data to work through next week—see below—it remains to be seen whether there is much of an audience around to react to the information those reports bring," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Friday research briefing.

Above: Pound to Canadian Dollar rate shown at 2-hour intervals alongside GBP/USD. Click image for closer inspection.

"We still rather feel the CAD will trade with something of a softer bias overall while risk appetite remains fragile (note that our correlation matrix shows CAD/S&P 500 correlations continue to run very strong at +87%)," he adds.

GBP/CAD was knocked back abruptly following last Thursday's BoE decision but will be more sensitive this week to developments in Canada where inflation data for November is out on Wednesday ahead of October's GDP number on Friday, both of which could matter for the Bank of Canada (BoC) policy outlook.

This is after the BoC raised its cash rate to 4.25% earlier in December but warned that it would contemplate in the weeks and months ahead whether or not it needs to be lifted any further, implying a risk of the bank calling time on its monetary policy tightening cycle early in the new year.

"In Canada, inflation may have eased slightly due to falling gasoline prices, but we will have to wait until next spring to see more notable decelerations that bring inflation closer to target," wrotes Andrew Grantham, an economist at CIBC Capital Markets, in a Friday look at the week ahead.

"Monthly GDP is likely to show the economy stagnating, albeit not yet slipping into reverse, at the start of the fourth quarter," he adds.

Above: Pound to Canadian Dollar rate shown at daily intervals alongside GBP/USD. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

Economists and financial markets will likely expect Canadian inflation to have mimicked the declines seen in many other parts of the G10 complex last month after price growth decelerated for a second time running in the U.S. and UK, among other places.

GBP/CAD could benefit this week if so but it would likely come as a setback if Canadian inflation proves to be more resilient than elsewhere or if the economy surprises positively when October's GDP number is released on Friday.

"Headline and core inflation measures in Canada have peaked but the deceleration in price gains is slow; sticky inflation and firm inflation expectations suggest that more Bank of Canada tightening cannot yet be fully excluded," Scotiabank's Osborne says.

However, in the meantime, GBP/CAD might be most likely to struggle for direction as the festive holiday period draws closer and trading volumes thin.

There is no meaningful economic data due from the UK this week though GBP/CAD would likely be vulnerable to any rebound in U.S. Dollar pairs.

Above: Pound to Canadian Dollar rate shown at weekly intervals alongside GBP/USD. To optimise the timing of international payments you could consider setting a free FX rate alert here.