GBPCAD about to break 200 day moving averageOpening door to determined downtrendCanadian inflation is key midweek releaseGBP looks to UK inflation, Bank of England for direction

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The Pound could be about to see its 2023 uptrend against the Canadian Dollar overturned by a key technical breakdown, but a busy week in terms of data could mean the UK currency could yet mount a defence.

The Pound to Canadian Dollar exchange rate (GBPCAD) has fallen by approximately 3.34% since it peaked in the 1.73 area in July and August; we note that these twin failures created a technical double-top on the daily charts which is considered a negative development for those seeking higher levels.

The subsequent pullback - to 1.6752 at the time of writing - confirms that pattern and comes in sympathy with a broader retracement in the Pound exchange rate complex.

But GBPCAD is amongst a number of GBP pairs that appear at risk of sliding to such an extent that their 2023 uptrends are negated.

Regular readers of Pound Sterling Live will note we have a simple designator of trend in the form of the 200-day moving average; as long as an exchange rate is above this level it is considered in an uptrend, but a break below here signals that trend is coming to an end and the risk of a downtrend establishing must be considered.

We note such a development in our GBPUSD week ahead forecast and thus see a soft outlook emerging against the Dollar.

For GBPCAD such a moment could soon be at hand:

Above: GBPCAD at two-day intervals showing the 200-day moving average.

Note that the 200-day MA could offer Sterling buyers some support and this level could therefore ensure GBPCAD can stabilise this coming week.

But a clear break below here opens the door to further losses.

That GBPCAD is following GBPUSD is no coincidence owing to the strong correlation between USD and CAD, which is understandable given the close proximity of the two economies and the high degree of interconnectedness.

GBPCAD can therefore extend lower as long as GBPUSD is also doing so. "Technical pointers are turning less bearish for the CAD," says Shaun Osborne, FX Strategist at Scotiabank.

Turning to this week's data docket for Canada, all eyes are on Canadian CPI inflation, due for release on Tuesday.

The market looks for a reading 3.8% year-on-year following a deceleration in the month-on-month figure to 0.2%.

The rule of thumb is that a beat on expectations can support the Canadian Dollar in that it implies the Bank of Canada will retain the optionality of another interest rate hike before year-end, which will ultimately support Canadian bond yields.

"Evidence of sticky core prices may give the CAD a small lift," says Socitabank's Osborne.

"We expect the BoC to remain on hold for the rest of the year and in 1Q 2024 as core inflation continues to fall, and as the economy decelerates. But risks remain skewed to the upside given that inflation will likely remain above 3.0% for the rest of the year and given pressures in the labour market," says an analysis from Bank of America.

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The Bank of England and UK inflation data are two events that could offer some meaningful support - or otherwise - to GBP this week, thus determining whether GBPCAD can find support at that already-mentioned 200-day moving average.

The Bank looks keen to signal the end of the rate hiking cycle is close, even as it delivers another 25 basis point hike in response to elevated inflationary levels.

The risk for Pound Sterling is that it makes a hash of navigating a tricky juncture that triggers a sell-off, as was the case throughout the duration of 2022.

"Will BOE indicate a pause after hiking 25bp next week? If so, GBP should have room to drop," says Anders Eklöf, an analyst at Swedbank.

Above: "Market pricing suggesting the BoE are finally within striking distance of the terminal rate" - Deutsche Bank.

Bank of England Governor Andrew Bailey contributed to Sterling weakness when he appeared before members of Parliament's Treasury Select Committee and explicitly stated the Bank was close to reaching a peak in interest rates.

The subsequent adjustment lower in UK rates and the Pound therefore suggests much of the downside that comes from a 'dovish' turn might already be accounted for, limiting potential GBP weakness at the event itself.

Wednesday's inflation release comes ahead of the Bank's decision and it is hard to see any upside for the Pound coming from this data set.

A stronger-than-expected inflation figure (expectations: 7.1% y/y, core expected at 6.8% y/y) would normally be associated with strength in the Pound, but markets might not reward such a print if it suggests the UK's stagflation problem is more acute than previously expected.

A downside miss will also simply suggest the Bank of England can afford to relax in November, egging on the recent trend of GBP weakness.

On balance, however, the non-staglationary signal of a below-consensus print is likely more supportive of the Pound on a longer-term basis.

"The MPC's hope will be that Wednesday's CPI print doesn't now raise pricing - and thus raise the stakes for sterling - right before their decision," says Shreyas Gopal, Strategist at Deutsche Bank.