GBP/CAD underscored by positive indicatorsBut advance to be capped by sizeable resistanceWatch Canadian GDP this week

Image © Bank of Canada

The Pound to Canadian Dollar exchange rate (GBP/CAD) is underpinned by constructive technical conditions and we doubt Thursday's Canadian GDP release will dent the pair's short-term upward progress.

The exchange rate trades above the 200-day moving average, currently at 1.6939, and only when the pair breaks below here would we say the current uptrend has been invalidated.

The 200 DMA was also the source of technical buying support through early February, and this suggests that any weakness in the coming days would find support here again.

Above: GBP/CAD at daily intervals with 200 DMA and RSI in lower panel. Track GBP/CAD with your own custom rate alerts. Set Up Here

The RSI is constructive at 60, indicating positive momentum while residing comfortably below overbought levels. The ADX has turned up and is now at 16.85, and we see scope for this figure to rise over the coming days, underpinning the uptrend.

We look for further upside to take GBP/CAD to the 2024 highs at 1.7223, ahead of the 2023 peaks at 1.7274 and then 1.7330. Note the close proximity of these resistance levels, which underscores the significant selling interest found here. We would be wary that these levels represent a limit to Pound Sterling's strength against its Canadian counterpart and would anticipate a retreat on any failed tests of the aforementioned figures.

There is nothing on the UK data and event calendar, leaving Canadian GDP data for Q4 as the main idiosyncratic focus for GBP/CAD this week.

GDP is released on Wednesday at 13:30 GMT, and the market is poised for a reading of 0.2% growth m/m in December, unchanged in November. This would bring the annualised quarterly figure to 0.8%, up from -1.1%.

Should the figures undershoot expectations, then the market might be inclined to bring forward the expected timing of a Bank of Canada (BoC) interest rate cut, which would weigh on CAD.

It fell across the board last week after Canadian inflation numbers for January undershot expectations and raised the odds of a rate cut at the Bank of Canada happening as early as April.

The Canadian inflation numbers were soft across the board, with the monthly change in CPI flat at 0%, whereas a rise to 0.4% was expected. Core inflation fell to 2.4% from 2.6% following a 0.1% m/m increase.

"At roughly 30%, markets are seriously underpricing the BoC easing in April," says Simon Harvey, Head of FX Analysis at Monex Europe. The falls in Canadian bond yields and CAD that followed the release were a result of markets revising expectations on the outlook for domestic interest rates.

This week's GDP numbers are nevertheless relatively stale and we expect any major moves in the CAD to be faded.

Be aware that the Canadian Dollar is trading as a 'mini USD', meaning that USD strength tends to be met with CAD strength on the crosses, i.e. GBP/CAD weakness.

This means the coming week of GBP/CAD action could ultimately depend on how USD behaves. We note that the USD, 2024's top-performing currency, is currently in a consolidative phase and is at risk of weakness as we head into month-end because a strong performance by U.S. markets will require portfolio managers to rebalance their FX exposure.

This could also underpin CAD weakness in the coming days.