GBP/CAD potentially risks of 1.69 or below short-termKey averages at 1.6890 & 1.6845 could impede lossesSome look to sell GBP/CAD, target losses toward 1.67 Recoveries potentially facing resistance around 1.7077 BoE rate decision & Canadian employment data eyed

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate entered the new week on the back foot near a major level of technical resistance on the charts and was attracting sellers ahead of the latest Bank of England (BoE) forecast update and North American job reports while risking slippage back toward the 1.96 handle.

Canada’s Dollar sat around the middle of the major currency league table on Monday as well as for the recent week after falling in the wake of better-than-expected economic growth figures for May out on Friday, which were accompanied by an estimated economic contraction for the month of June.

Losses for the Loonie lifted both USD/CAD and GBP/CAD on Friday but were recovered somewhat early in the new week when local strategists tipped the latter as a sell from 1.7027 in their Trade of the Week with a target level down near 1.67, citing Thursday’s BoE decision and their expected trajectory of the U.S. Dollar.

“Our bias is to be short GBP either way. With almost 90bp of cumulative hikes priced in over the next five meetings, the risk is that a more aggressive move this week may actually see longer-term rate expectations fall,” says Adam Cole, chief currency strategist at RBC Capital Markets.

“Curve “pivots” of this kind are generally associated with currency weakness. Our bias is toward a stronger USD, which would generally see CAD outperform on the G10 crosses and GBP/CAD also has the attractive property of being uncorrelated to global equity prices,” he adds.

Above: Pound to Canadian Dollar exchange rate shown at daily intervals with selected moving averages.

Sterling also softened against the Canadian Dollar and some other currencies on Monday as money and credit figures illustrated how rising interest rates are eroding incomes and driving up indebtedness among households, while showing the cost of new mortgages reaching 4.63% in June and the rate on the overall mortgage book climbing to 2.92%.

Hence why Thursday’s forecast update and interest rate decision are important and more so in face of implied market expectations for three further increases to take Bank Rate up from 5% to 5.75% by year-end, although there is uncertainty about the outcome following the release of June inflation figures.

These revealed scope for something like the BoE’s May forecasts to still play out, which had envisaged inflation falling to around 7% in July and something like 4% by year-end.

These inflation projections were based on a Bank Rate of 4.75%, which was lower than the current level and potentially implies a faster return of inflation toward the target.

“The market still has the BoC tightening at some point this fall, but the distribution could shift further towards the Sept meeting if employment bounces back this Friday,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

Above: Quantitative model estimates of ranges for the week ahead. Source Pound Sterling Live.

“One item to watch is whether the labour market can absorb new entrants into the labour force as quickly – something that we didn’t quite see in June which led to an uptick in the UE [jobless] rate. That’s a risk to watch especially as its becoming clear that job vacancies are dropping,” he adds.

Thursday’s Bank of England decision is the main risk event for Sterling but is followed by the release of another Canadian job report on Friday, which the CIBC Capital Markets team says is likely to show the labour market struggling to absorb new entrants as rapidly as it did in the past.

The data will be an important influence on the outlook for Canadian borrowing costs from September and going into year-end while if in line with CIBC’s forecasts, it could enough to head off any further increase in the cash rate, which was raised to 5% in July.

Economists project on average that overall employment likely rose by a lesser 20.6k in July with the unemployment rate seen rising from 5.4% to 5.5% this month, which would also be a risk to market pricing of the outlook for the Bank of Canada cash rate, which still suggests some probability of an increase to 5.25% by year-end.

That would, in turn, potentially amount to a downside risk for the Canadian Dollar and an upside risk for GBP/CAD heading into the weekend.

Above: Pound to Canadian Dollar exchange rate shown at weekly intervals with Fibonacci retracements of 2021 downtrend indicating possible areas of technical resistance for Sterling while selected moving averages denote possible support and/or resistance.