GBP/CAD risking slippage to 1.6700 or belowCanadian GDP data sets direction short-term Brings BoC cash rate outlook back into focus

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate opened the holiday-shortened week near its May lows with a clearer inflection and deeper correction potentially underway on the charts but one that could yet be reversed by Wednesday's release of economic growth data in Canada.

Canada's Dollar climbed against most other major counterparts in early European trade on Tuesday to cement its grip on the top spot in the G20 currency rankings for the month of May with barely more than a day to go before the period closes with the release of GDP data for March.

Gains for the Loonie appeared to be in the process of pushing GBP/CAD decisively below its 50-day moving average at 1.6813 on the charts, and toward the 1.6736 area, which would mark just more than a one-third retracement of its early February rally from near 1.61.

"GBPCAD peaked at 1.7146 at the start of May and has steadily drifted lower since," says Shaun Osborne, chief FX strategist at Scotiabank.

"The 200-week MA at 1.6796 has held on a weekly close basis so far. If the GBP can regain 1.6850 in the next week or so, gains can resume. Otherwise, a retest of monthly trend resistance-turned-support at 1.6700 is likely to develop," he adds in a recent review of the Canadian Dollar charts.

Above: Pound to Canadian Dollar rate shown at daily intervals with Fibonacci retracements of February rally indicating possible areas of technical support for Sterling while selected moving averages denote possible support and resistance. Click image for closer inspection.

GBP/CAD topped out earlier in May when a U.S. Dollar rebound placed Sterling under pressure and financial markets began to assume the Bank of Canada (BoC) would resume raising its cash rate later this year, though the merits of the latter assumption could be tested this Wednesday.

"Markets are currently pricing about 34bps of hikes by the October meeting, but we think that if the BoC were to resume hiking, the odds that the Bank hikes more than once, or by more than 25bps are high," says Isabella Rosenberg, a G10 FX strategist at Goldman Sachs.

"Nevertheless, we do not currently expect the BoC to hike at the upcoming June meeting, given that the bank has stressed the need for an “accumulation” of evidence, and one print does not seem quite like evidence enough," Rosenberg and colleagues write in a Friday research briefing.

Canadian inflation took markets by surprise in the middle of May when figures for April suggested price pressures likely accelerated again last month but the increase was small and followed closely behind earlier announced indications that Canada's labour market could now be softening.

Source: Goldman Sachs Marquee. Click for more detail inspection.

While the Bank of Canada has said it would raise rates further in response to signs of more persistent inflation, data released earlier in May suggested BoC policy is already having the desired effect on local employment with possible downward implications for wage growth and inflation further down the line.

This potentially leaves a lot to be determined by Wednesday's release of March GDP data in Canada and what it says about the performance of the economy in relation to BoC forecasts, the release of which is the highlight for GBP/CAD in what is set to be a quiet period for UK economic data.

"March GDP on Wednesday will be the last major piece of data we will get ahead of the Bank meeting on June 07," writes Sarah Ying, a quantitative strategist at CIBC Capital Markets, in a Monday market commentary.

"CIBC Economics is forecasting a decline of 0.1%m/m in line with market consensus, bringing the quarterly figure to 2.6% on an annualized basis, three ticks above Bank forecasts found in the April MPR. While Q1 activity data has been quite robust, there are signs it is decelerating into Q2," she adds.

The risk on Wednesday, however, is of a deeper-than-expected economic contraction leading financial markets to begin wavering on expectations for further increases in the BoC cash rate later this year, which would likely help GBP/CAD back onto its feet.

Above: Pound to Canadian Dollar rate shown at weekly intervals with Fibonacci retracements of November rally indicating possible areas of technical support for Sterling while selected moving averages denote possible support and resistance. Click image for closer inspection.