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The Pound has once again failed at a key resistance area against the Canadian Dollar, and we predict a pullback in the coming week.
The Pound to Canadian Dollar exchange rate (GBP/CAD) rose to a two-week high of 1.7844 last week, but losses to 1.7762 on Monday suggest a technical barrier around this area is too difficult to overcome near-term.
A look at the daily chart indicates the region between 1.7844 and 1.7868 forms a solid selling line and our initial target is 1.7700, having noted the most recent pullback (Aug. 23-30) found buying interest here and another crack at the 2024 highs then ensued.
But the failure of 1.77 would entail a deeper pullback that could introduce us to 1.7450, which is the August 08 low.
Technicals are relatively important for this pairing, given the cloudy fundamental drivers behind the Canadian Dollar. We tend to see GBP/CAD track the fortunes of GBP/USD, as is the case on Monday. "The softer pound reflects the general shift in favour of the USD since Friday’s US data reports," says Shaun Osborne, an analyst at Scotiabank.
But, rewind to Friday and GBP/CAD registered a daily gain despite the sharp fall in GBP/USD; indeed, September has seen Sterling advance against its Canadian cousin despite a rally in the U.S. Dollar. To be sure, the market's reaction to the Canadian job report will have played a part, but it nevertheless contributes to the generally opaque nature of the fundamental setup.
Working against the Canadian currency are a number of rate cuts from the Bank of Canada and the odds of further cuts (potentially a 50bp'er) given the slowdown in the economy. At the same time, the Bank of England has cut only once and looks set to deliver just one more cut in 2024. This differential in the pace of cuts should ultimately support GBP/CAD.
So, on the one hand, we have the GBP/USD pulling GBP/CAD back down, but rate differentials pulling in the other direction, which suggests the overall trend should remain higher, but we should make way for near-term technical challenges and a USD comeback.
Analysis from Scotiabank says the CAD's rebound on Monday is linked to positive risk appetite, with global stocks in the green and crude oil modestly firmer on the session.
"The steady CAD and slightly firmer MXN suggests something of a 'buy North America' mood across markets but these trends tend to be fleeting," says Osborne.
The week's calendar risks involve the U.S. inflation report, due Wednesday at 13:30 BST, where a soft print can bolster the pound against a host of G10 currencies; however, the reaction by GBP/CAD is more ambiguous given what we have mentioned regarding the uncertainty in the exchange rate's drivers.
Reactions to domestic UK data should be less ambiguous. "Markets are focused on Tuesday’s wage and employment data. Soft wage growth may nudge sterling a little lower still," says Osborne.
The market looks for employment to have risen 84K in the three months to July, with the unemployment rate at 4.1% and average earnings is predicted to have risen by 4.1% in the three months to July, down from 4.5%.
Wage pressures have been coming down, but some economists are concerned that they are not coming down fast enough, something that Bank of England will be watching closely.
The Bank is not expected to cut rates again in September, but there is some debate over whether they will move again in October and November. A weaker-than-forecast wage print could boost these odds, which will weigh on the Pound.
Wednesday will see the release of UK GDP figures for July, with the market looking for 0.2% growth, up from the previous month's flat 0% outturn. On paper, the GDP figure is secondary to the wage release, but any sizeable surprises (i.e. more than 0.2pps) can shake the market, with Sterling likely to weaken on any disappointments and rise on any surprising strength.