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The Canadian dollar will be preferred to sterling in the coming days.
The pound to Canadian dollar conversion (GBP/CAD) is forecast to stay under gentle pressure in the coming days, potentially touching 1.8296, although it's not in danger of any serious weakness.
1.8296 is the low reached back in August; it forms the bottom of the multi-month range that has been in place since March.
The 21-day exponential moving average (EMA) is pointed lower and is capping GBP/CAD recoveries, guiding Sterling lower in the short-term.
Downside damage should be limited by GBP/CAD's mean-reverting tendencies: the exchange rate has traded between 1.8296 and 1.89 for most of the year, with the mid-point of 1.85-1.86 capturing the lion's share of action.
This is something of an equilibrium point for GBP/CAD that is quite magnetic and it isn't too far away from the current level of 1.8459.
We don't see GBP/CAD's 2025 range breaking down in the current environment, which tells us the pair is relatively comfortable in the current area, and downside pressures are likely to be contained.
CAD's week ahead will be dominated by Monday's inflation data release, where a decent 0.2% m/m is expected. Note that Canada's inflation rate is running ahead of the Bank of Canada's 2.0% target and any upside surprises in the data should bolster the view that the Bank is done cutting rates.
This should offer CAD some support via the rates channel going forward and lessen the odds of GBP/CAD recapturing 2025's highs at 1.8840.
The UK's inflation data is due for release on Wednesday, and we will get confirmation that a disinflationary period is commencing in the UK, with headline inflation anticipated to fall to 3.6% y/y from 3.8%.
The Bank of England will use this as evidence of the need to cut interest rates further, which will weigh on the pound.
If the interest rate differential between Canada (no cuts) and the UK (more cuts) starrts to widen again, then GBP/CAD can come under pressure and potentially break below the range we mentioned above.
So in this regard, this week's data could be quite influential.
Should the UK's inflation outcome beat expectations, rate cut bets should unwind somewhat, and this should offer the pound a boost.
An under-pressure Chancellor Reeves will deliver the budget next week. Picture by Kirsty O'Connor / Treasury
Sterling upside should be in short supply this week as we are now in the final lap of the pre-budget race. Next Thursday finally brings about the release of the government's plans, and any trip-ups will potentially pressure the pound.
That being said, a great deal of negativity is in the price, and any half-decent effort should offer the pound the chance to recover.
Given this, sterling could recover through December.
In North America, U.S. data will probably be more influential to Canadian dollar performance this week than anything out of Canada.
GBP/CAD will be well supported if the GBP/USD recovers further on account of a decent alignment between the two pairs.
Investors prepare for the return of official U.S. economic data releases now that the Federal shutdown has been resolved, which should provide some clearer guidance as to how the U.S. economy is performing.
Given the impending releases, it's little wonder that traders have paused the dollar's advance: conviction trades will be put on hold until the official data gives some certainty.
"After a long period with almost no statistical news, American statistics will start to be published again and probably the flow will begin with a real heavyweight: the labour market in September, which is scheduled to be presented on Thursday. Consensus expects employment to accelerate to +50,000 from +22,000 in August and the unemployment rate to remain unchanged at 4.3%," says a note from Commonwealth Bank.
Anything above here will weigh on GBP/USD and therefore sink GBP/CAD.
However, a big downside miss would have the opposite effect and draw GBP/CAD back into the middle of its range.