GBPCAD uptrend intactBoC's Gravelle in focus TuesdayU.S. inflation is CAD's highlightUK inflation midweek is GBP's highlight

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The Pound to Canadian Dollar exchange rate (GBPCAD) is in a near-term uptrend that can continue to extend, provided this week's inflation data out of the UK and U.S. don't throw up significant surprises.

GBPCAD has been trending higher since September 28 and has created a channel that, thus far, has shown some decent predictive powers.

The lower end of the channel is particularly instructive as it has tended to support the uptrend, as seen in the below:

Above: GBPCAD at daily intervals with uptrend support shown. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

Note, too, that the Pound-Canadian Dollar is trading above the 200- and 50-day moving averages, suggesting momentum is broadly positive and advocating further advances.

Weekly open-to-close moves since the post-September uptrend began tend to roughly amount to 0.70%, and this puts 1.70 in reach to the upside, provided recent dynamics are willing to extend.

A close below the trendline at any point this week should alert GBPCAD watchers that the trend could be waning, and support at 1.6784 comes into view on any growing weakness.

Turning to the calendar, the key for this pair will be the release of U.S. inflation numbers midweek, as this could trigger notable moves in the U.S. Dollar.

The Canadian Dollar has tended to track the U.S. Dollar on the crosses (i.e. against the EUR, GBP, etc), owing to the tight economic and financial linkages between the U.S. and Canada.

Should U.S. inflation undershoot the 0.1% month-on-month rise the market is looking for, the U.S. Dollar can come under pressure, and the Canadian Dollar too.

Core U.S. CPI is forecast to remain unchanged at 0.3%, and the rule of thumb is that should inflation beat expectations, the odds of another Fed rate hike increase and rate cut bets recede.

"We think that markets would be very attentive to any evidence that inflation remained too sticky for comfort and thus force the Fed to 'engineer' a renewed tightening of US financial conditions, in a boost to the USD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Such an outcome could, in turn, weigh on GBPCAD.

On the Canadian calendar, watch for any comments regarding future rate moves at the Bank of Canada (BoC) from Deputy Governor Toni Gravelle, who is due to speak on Tuesday at 09:30 BST.

Expectations for further BoC rate hikes have fallen notably over recent weeks, thanks to a string of below-consensus inflation, GDP and labour market readings that all point to a slowing economy.

This 'pricing out' of BoC expectations has underpinned recent CAD weakness, and Gravelle's comments could be instrumental in testing this narrative.

Above: "Falling energy contribution the primary driver of the fall in headline CPI in October; but non-energy components to ease too" - Barclays.

This week is busy with earnings, inflation and retail sales data on tap for the Pound. Earnings are due at 07:00 GMT on Tuesday, with the consensus looking for a reading of 8.3% in September and should the outcome be above this, the Pound could find some support.

However, the week's highlight is Wednesday's inflation report, due at 07:00, with the market preparing for a sizeable drop to 4.5% year-on-year from 6.7%.

Should the outcome be above this figure, the Pound could be supported, although we would expect any strength to be limited.

"Inflation data is unlikely to change the direction of travel for the Bank of England, and we only expect a minor impact on exchange rates. We hold on to our range-trading theme with a lower limit at the psychological 1.20 resistance level," says Thomas Flury, Strategist at UBS.

Should inflation undershoot, the market would likely boost bets for rate cuts in 2024, resulting in further weakness in the Pound.

"The fall in household energy bills, coupled with base effects, is set to drive a sharp decline in headline inflation in October, though we also expect moderation in core inflation with both core goods and services easing," says Abbas Khan, an economist at Barclays.

"A drop in the Ofgem Price Cap alongside slowing food and core goods momentum should result in headline CPI dropping by close to 200bps," says Sanjay Raja, Senior Economist at Deutsche Bank.

"More disinflation pressure is building. Our own DB Price Survey Tracker points to another 150bps fall by springtime. And our forecasts continue to show headline CPI printing closer to 3% y-o-y by April 2024," he adds.

Above: What the Bank of England is forecasting. Image courtesy of Deutsche Bank.

"For now, we continue to see some downside risks to the Bank of England's CPI projections, which we think should open the door for modest rate cuts by springtime next year," says Raja.

Retail sales are anticipated to have fallen 1.0% in the year to October and 0.9% in the month.

Should the outcome be above these estimates, the Pound could rise, although gains would likely be limited. Instead, risks are tilted to the downside in the event the outcome is below estimate.

"Retail sales were surprisingly soft in September, dropping 0.9% m/m. But we think this is largely noise and expect a decent rebound in October. September's sharp falls in sales in the non-food and non-store categories look particularly odd, and we expect these sectors to have largely made up those losses in October," says Andrew Goodwin, Chief UK Economist at Oxford Economics.